There seems to always be a lot of discussion and media attention towards the older demographics and whether the baby boomers are going to have enough for a secure retirement, but what about the younger generation? My demographic in the 40 and under age range have to seriously assume that Social Security will be drastically reduced, if at all there, when we reach age 65, 66, 67 -- the age keeps getting raised and looks poised to hit 70 soon to help shore up the $15 trillion debt load of the United States government.
A company pension is a thing of the past, meaning we have full responsibility of providing a secure retirement for ourselves and family. History has shown that the stock market is a great way to do that, through a balanced portfolio and reinvesting dividends. Here is a $10,000 portfolio I see as ideal for providing the proper risk and growth for a 30-year old looking to accomplish this goal.
Jeremy Siegel is a well-known professor of finance at the Wharton School of the University of Pennsylvania. He has appeared on CNBC, CNN, NPR, Bloomberg, and various financial magazines. What stands out to me is his research in his fantastic book Stocks for the Long Run, for two reasons. One that the best performing stock he found wasn't a glitzy technology company, energy giant, or well-known restaurant, but tobacco maker Philip Morris, now known as Altria (MO). From 1917 through the end of 2003, MO returned a 17% annualized return assuming all dividends were reinvested. That was a massive 730 basis point per year return greater than the average stock.
The second very interesting fact to me is that a full 40% of real returns in the stock market this past century came simply from dividends. That means with the average annual return of approximately 10%, 4% came simply from dividends signifying how important those payments are to juicing our returns. Keeping these facts in mind this is a portfolio I would be happy to recommend to a 30-year old with $10,000 to invest and decades away from retirement.
So, firstly I think having ten stocks with a $1,000 in each provides enough diversification, granted they're in different industries and with, preferably, some geographical diversification as well. So, keeping this in mind, I think the energy giant Exxon Mobil (XOM) would be a nice pick. XOM trades at a relatively attractive 9x forward and trailing P/E, 1x PEG, .9x P/S and EV/S, and consistently growing 2.5% dividend yield. Moreover, it has operations pretty much around the world giving us free geographical diversification.
My second pick would be United Kingdom-based telecommunications giant Vodafone Group (VOD). With the fallout between the AT&T and T-Mobile merger, VOD's 45% ownership in Verizon Wireless should surely benefit and either way VOD trades at a cheap trailing 12x P/E, 9x forward P/E, 1x P/B, and fantastic 7.9% dividend yield.
Moving over to commodities, Steel giant and Luxembourg-based Arcelor Mittal (MT) looks great trading at a trailing 11x P/E, 7x forward P/E, .3x PEG and P/S, just over 4x EV/EBITDA, .4x P/B, and secure 4% dividend yield. Looking at the restaurant space, YUM! Brands (YUM) provides both a diversified group of restaurants and worldwide diversification, with it most notably having the largest presence in China of any restaurant company. YUM trades at a reasonable 21x trailing P/E, 17x forward P/E, 1.5x PEG, approximately $1.2B in FCF this past year, and nice 2.2% consistently growing dividend.
Looking over at healthcare, there are a few tempting names as the group has attractive valuations and dividend yields. I think since it comprises roughly 20% of total GDP spending, it would be ok to have two of them and I like Johnson & Johnson (JNJ) and Sanofi-Aventis (SNY). As I brought up recently here, JNJ trades at an attractive trailing 15x P/E, 12x forward P/E, just over 8x EV/EBITDA, fantastic profit and operating margins, along with $14B in FCF this past year and fantastic 3.7% dividend yield. Moreover, it has such a diversified revenue stream and client base worldwide giving us free diversification in that regard. French-based SNY has great valuations as well trading at a trailing 14x P/E, 8x forward P/E, 7x EV/EBITDA, $11B in FCF this past year, and very nice 5.4% dividend yield.
Semiconductor giant Intel (INTC) allows us to get a high-quality technology company at a great price, and recently had bullish options activity I brought up here. The company is now trading at a historically cheap 10x trailing P/E, 9x forward P/E, .8x PEG, over $11B in FCF this past year, and consistently growing 3.6% dividend yield.
A financial company would provide great diversification, and JPMorgan Chase (JPM) looks great at these prices. Trading at a 6x trailing and forward P/E, .7x PEG, .6x P/B, and attractive 3.5% dividend yield makes it a high quality buy for the long-term investor as we are in this case. Eventually the real estate market will recover and when it does, home improvement store maker Lowe's (LOW) should benefit. LOW trades at a relatively cheap 17x trailing P/E, 13x forward P/E, .6x P/S, .7x EV/S, 7x EV/EBITDA, and nice 2.5% dividend yield.
For our tenth pick, look no further then the fantastically managed and widely-diversified Berkshire Hathaway (BRK.B). This of course is the investment vehicle of world-famous Warren E. Buffett and even he said he would buy back shares if the company is at 1.1x P/B or less. Well as of the Nov. 29 close, the stock was barely above that at 1.17x P/B, while trading at a 16x P/E, approximately $12B in FCF this past year, and giving us investors free diversification in pretty much all industries as BRK.B owns large stakes in a wide-range of companies and insurance. This is the one company mentioned that doesn't pay a dividend, but I'm willing to make an exception as Buffett has proven himself to vastly outperform the general market by over 1,000 basis points during his 45 year+ investment tenure.
Overall, this portfolio gives us great diversification in energy, telecommunications, commodities, technology, and healthcare among other industries. Moreover, we have companies that gives us worldwide diversification and a fantastic average yield, including BRK.B which gives no yield, at 3.5%.
If a 30-year old were to buy this portfolio now, 35 years later at 65 years of age, I'm confident he will have a portfolio that will have outperformed the general market and form a nice basis as he/she looks towards a secure retirement.