How Do You Know if a Stock Is Good for Long-Term Wealth Building?

Spotting a stock that will genuinely work for you over decades—rather than one that might explode and crash—requires looking deeper than just recent price movements. While the broader stock market has demonstrated resilience over any 20-year period, individual stocks tell a different story. Some can stagnate for years or disappear entirely, regardless of overall market performance. So how do you know if a stock is good enough to hold through market ups and downs? Here are the signals that separate real long-term winners from flash-in-the-pan traders’ darlings.

Does It Have Reliable Earnings Momentum?

The first thing to examine is whether a company’s earnings actually grow consistently, year after year. Companies that spike dramatically overnight without underlying profit growth typically fade fast. Real long-term stocks show predictable, sustainable earnings expansion—the kind that holds up even when the economy slows down. This consistency is what allows investors to trust the valuation today and feel confident betting on tomorrow.

Can It Generate Strong Returns on Capital?

Investment managers like Jensen Investment Management start their entire research process with this metric: how much profit does the company generate for every dollar of shareholder capital? A company with high return on equity doesn’t need constant infusions of new money or debt to keep growing. According to Jensen’s analysis, high-ROE businesses typically possess competitive moats, genuine growth potential, and lower volatility compared to broad market indices. This is the difference between a company that’s genuinely valuable versus one that merely looks good on paper.

Is the Balance Sheet Healthy?

Just as personal debt constrains household finances, corporate debt can choke a company’s ability to deliver steady returns. When recessions hit, highly leveraged companies find their cash flow strangled by interest payments and debt service obligations. Companies carrying lighter debt loads, by contrast, possess the financial flexibility to weather storms and continue operating profitably. While aggressive leverage can amplify gains in boom times, that boom-or-bust pattern rarely builds long-term shareholder wealth.

Is Leadership Competent Enough to Execute?

Even a company with world-class products and rising demand can stumble if management lacks execution discipline. Exceptional leadership teams can turn struggling companies into market leaders, driving quarter-after-quarter earnings beats. When evaluating how a stock is likely to perform, assess whether management has a track record of delivering on commitments and adapting to market changes.

Does It Consistently Reward Shareholders?

Companies that pay rising dividends continuously are, by definition, generating surplus cash. “Dividend aristocrats”—firms raising payouts for 25+ consecutive years—typically represent mature, dominant market players. While they lack the explosive upside of small caps, their business stability translates to predictable, compound long-term gains. A rising dividend signals not just current profitability but management’s confidence in future earnings power.

Does It Have Multiple Revenue Drivers?

Single-product hits can produce outsized short-term gains, but decades of steady returns usually require a diversified product portfolio. Multi-brand, multi-category companies deliver more stable earnings because weakness in one segment is offset by strength elsewhere. This business model architecture naturally produces lower volatility and more predictable stock performance over long holding periods.

Making Your Final Decision

Stock prices fluctuate based on countless factors, but knowing how a stock performs against these six criteria provides a strong foundation for research. However, you’ll need to dig deeper still. Consider your personal risk tolerance—some stocks will swing dramatically even if fundamentally sound. Investigate whether the company’s profit engine remains viable or if it’s approaching saturation. Watch whether the stock is trading on emotion rather than fundamentals, a situation beyond your control but one that could derail returns. Finally, build a diversified portfolio rather than concentrating your capital in a single company. By evaluating multiple stocks across these dimensions and holding a mix of positions, you significantly improve your odds of consistent long-term wealth creation.