The following portfolio is perfect. It is perfect for an individual with a young family such as myself, perfect for widows and orphans, and perfect for those nearing or in retirement. I have no worries that as long as these companies are bought close to their 52-week low, the buyer will substantially benefit over a number of years, due to compound reinvested dividends and capital gains. Buying low will dramatically increase your net worth, and more importantly, your income, over time. This can be achieved while maintaining a low beta, healthy payout ratio, and owning the best-of-breed companies. In this portfolio, some sectors have multiple holdings, some sectors are left out completely. I do not feel the need for a bank, tech company, utility, or healthcare/industrial conglomerate, but all are omitted for separate reasons.
Banks: Banking is very profitable if done correctly, but it seems banks play by their own rules and have little transparency and accountability. Also it seems most banks dilute their float regularly, when I will only buy companies that do the opposite. JP Morgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) have all increased float by over 40% in the last decade, with Chase nearly doubling its share count and Citigroup embarrassingly has 6x more shares than it had 10 years ago. Now these companies want to buy back shares, at inflated prices. Wells Fargo, the least dilutive bank of the group, would have to spend a whopping $66 billion dollars at $35 to just get back to the same share count it had 10 years ago (from 3.4B in 2002, to 5.35B today). It's insane to wake up after a decade of dilution and say it's in the best interest of shareholders to buy back stock. So sorry banks, no room in the portfolio for you. Regional banks have a better history, but I want large-cap stable companies in my portfolio, and most banks aren't big enough to make the cut.
Tech: Technology is all about, "what have you done for me lately?" Intel (INTC) spends $34 million A DAY in CAPEX, to make a product that will be obsolete within a decade, at best. I don't know what the next tech boom will look like, what it will be, or who will make it; but I do know that there are much better options out there that let me sleep at night. Will I make a fortune buying Apple (APPL) at today's prices and holding for dividend growth? We'll never know. 99% of all the tech companies the world has ever had has gone out of business because of new technology, poor management, or changing times. I don't have a crystal ball, but something tells me in 20 years iPads will be in a museum.
Utility: These are great companies with limited growth and most are highly regulated. However with little organic growth and no international growth by nature, they can only cut so many costs and only raise prices so much. EPS are trivial usually, and one-time charges seem to happen ALL THE TIME in this industry. Also in this low-yield environment, most utilities that had decent yields have been overbought and I don't feel the need to chase yield in a 40-year investing window.
Healthcare: This is a very important category, but do you know who is going to cure diabetes? AIDS? Cancer? A breakthrough for one company could mean the downfall of another, and since I have no medical knowledge to speak of, why risk it? Pfizer (PFE) cut dividend in last crisis, Johnson & Johnson (JNJ) has thousands of claims against it at potentially $3M each for its vaginal mesh disaster, and the hip replacements are frightening as well. I can tolerate recalls of McNeil products such as Advil and Children's Motrin, but recalling medical devices already surgically implanted in someone's body sounds rather expensive and negligent.
Industrial: No slight on industry, I like many names from Caterpillar (CAT) to Norfolk Southern (NSC), but I just don't see the need to select any of these at this time. I have these, as well as a few others, on a secondary list if the prices drop, but that is another list and not part of this article. Some companies have to spend billions on CAPEX a year retooling their plants, just to turn around and do the same thing again next year, General Motors (GM) and Ford (F) come to mind. No one wants to buy a brand new 1998 Ford Mustang today right? This industry is cyclical at best, and I don't a company that has less brand loyalty. Is the brand of car you buy or which airline you fly that important? I want cheap and reliable, I don't care who provides it for me.
So without further ado, the PERFECT portfolio is...:
1. Coca-Cola (KO) - consumer goods, 50+ years of annual dividend raises and one of the best brand names in the world. It is a free cash flow giant that is still growing, and it makes the same product over and over again, which minimizes CAPEX. Share count is down >7% in last decade, and it has a share repurchase program over the next couple years that can reduce the float by 500M shares, or 11%. Net margin of 16%, and it makes the same thing everyday.
2. McDonald's (MCD) - restaurant, 35+ years of annual dividend raises and another one of the best brand names in the world. It too is a free cash flow giant, great buybacks over time, and very dedicated to shareholders. It averages nearly double the revenue per store than any other fast-food competitor, and I have never seen an empty McDonald's drive-thru, which is something I cannot say about Arby's, Wendy's, Taco Bell, etc.. Share count is down >20% in last decade, during which time dividends have increased from $.40/year to $3.08/year. Last five-year ROE average is 35%, which speaks volumes for the competency of management. It makes the same thing every day.
3. Wal-Mart (WMT) - discount-variety store, 35+ years of annual dividend raises. It is a free cash flow giant with revenue over $100B a quarter, international growth is making that number larger. It has an excellent share buyback program, reducing float by almost 25% in the last decade, while increasing the dividend over 400%. People shop here everyday, and Americans buy 25% of their yearly groceries from this one company.
4. Philip Morris (PM) - consumer goods, only five years of annual dividend raises, however this was spun off from the greatest company to own, from a shareholder standpoint, in the last century. The first crop planted in the New World was tobacco, and it continues to be a world staple more than 300 years later; 16% of all cigarettes in the world are from Philip Morris, and closer to 30% if you don't include China. As Warren Buffett said, "I'll tell you why I like the cigarette business. It cost a penny to make. Sell it for a dollar. It's addictive. And there's a fantastic brand loyalty." Excellent management, shareholder friendly with great buybacks and high growth. It makes the same thing every day.
5. Target (TGT) - discount-variety store, 45 years of annual dividend raises, and revenue expected to increase >15% yearly over the next five years. Management expects $8 EPS and $3 yearly dividends by 2017, which is roughly double where it stands today. Buy soon knowing that whatever the yield Target has when it pays $3 dividends will double your cost basis yield. I don't know anyone who doesn't like shopping at Target, good clothing selection and expanding to groceries. Ever shop at Kroger (KR) and realize that you could save more than 15% just by buying the exact same thing from Wal-Mart or Target?
6. Chevron (CVX) - energy supermajor, 25 years of annual dividend raises, and while the buybacks are small and only decreased float by >6% over last decade, book value has increased from $16 to over $70 per share during that time. It has a fortress balance sheet, and is committed to shareholders though its impressive EPS and dividend growth. The world stops moving if oil and energy isn't produced DAILY, meaning the world depends on the supermajors whether we like it or not. You use energy everyday and you have no choice.
7. ExxonMobil (XOM) - energy supermajor, 30 years of annual dividend raises, and a long-term share buyback plan that has reduced share float by over 30% in the last decade, while more than doubling the dividend it had at the beginning of that time. Great ROE and stellar balance sheet. As with Chevron above, the world NEEDS energy to survive, putting energy supermajors in a wonderful position. If oil jumps to $500 a barrel, and gas is $16/gallon, we are still going to buy fuel whether we like it or not.
8. Visa (V) - business services, became a public company in 2008, and since then it has reduced share count by over 30%! In the meantime it has doubled the dividend since 2008, while maintaining NO DEBT and increasing free cash flow yearly. The world is switching from cash to plastic, and credit card companies stand to make a significant profit. Visa is necessary because it's much easier to carry a card in that it is easily replaceable and only you know the true amount on it, instead of having to carry around cash, which is easily stolen and irreplaceable. You use debit/credit cards everyday.
9. MasterCard (MA) - business services, relatively new to the dividend growth game, but has been increasing payout substantially over the last few years, and with earnings expected to double within the next five years, the dividends may do the same. MasterCard has no debt, and has gross margins of 100%. Unbelievably low CAPEX and incredibly high free cash flow (36% of sales!) make this company a cash machine, and it gets a cut of every purchase you make with your MasterCard. This is the only company on the list that has increased share count over the last decade, but it has decreased over the last five years, and it has increased its buyback and dividend significantly this year and I believe it will do the same for a long time. On vacation I'd much rather have $10,000 in a bank account connected by my MasterCard than have $10,000 cash. You use debit/credit cards everyday.
All of these could be considered consumer staples, and all of them have dividend charts that look like "steps" gaining momentum each year. Most of these companies are expected to increase revenue at more than 10% yearly, leaving ample room for dividend growth. The earnings horse pulls the dividend cart. Every company has an overseas presence and is growing, so just because each company is based on American soil doesn't mean that this portfolio is not internationally diversified. This is my dream portfolio as a 25-year old with children, and it is the SAME portfolio I would recommend to my 18-year old friends, 80-year old grandmother, and anyone in between. A low beta, high EPS and dividend growth, coupled with powerful brand names and the best companies in the business make this a winning portfolio for anyone.
I also like the S&P500 (SPY) index, which yields nearly 3%, however during times of market highs (which is where we are at currently) I do not view this as a prudent investment. However, that being said, you can never go wrong with a buy-and-hold forever approach when it comes to indices. If your grandparents had bought the SPY (or equivalent) in their day and reinvested dividends for you, you wouldn't be working today.
This is a portfolio specifically designed for my wife and I, and I would be hard-pressed to find a better group of companies to hold until retirement. If there are any switches, omissions, arguments or comments I would love to hear them.