Five Stocks For The Timid Investor

Includes: JNJ, KO, MCD, MMM, PAYX, PG, WM
by: MyPlanIQ

We continue to look for dividend bearing stocks to help fill the hole caused by low interest rates that have negatively impacted bonds. In reading up on the subject, I came across an interesting article by the Motley Fool's Brian Stoffel who was commenting on a March 12 Wall Street Journal piece titled Why Stocks Are Riskier Than You Think. The story encourages an investment in just about everything - bonds, TIPS, options, and hedged ETFs - except companies on the stock market.

It's an interesting read and the conclusion is that despite all the recent mayhem in the markets, avoiding stocks is not the answer. Stoffel has an interesting summary and suggests a list of safe and simple to understand stock selections.

"For the average investor who wants to avoid the risky stocks, but still have a simple way to profit from the stock market, there is a better way: dividend stocks. By looking for companies with wide moats, solid business models, and stellar balance sheets, you can easily guarantee above-average returns for your investments. I believe any one of these five companies offers excellent opportunities, and you should be very familiar with each of their easy-to-understand business models." (See table below)


Easy-to-Understand Business

Dividend Yield

Payout Ratio

Coca-Cola (NYSE:KO) It makes beverages, most of which you're likely very familiar with 2.9% 51%
Johnson & Johnson (NYSE:JNJ) A company all-things-medical - it provides everything from Band-Aids to surgical equipment 3.5% 64%
Procter & Gamble (NYSE:PG) Check your bathroom; at least half of your products are likely from P&G 3.1% 60%
Waste Management (NYSE:WM) The company that picks up - and recycles - your garbage on a regular basis 4.1% 67%
Paychex (NASDAQ:PAYX) "Cuts checks" and sends them to employees of small and medium-sized businesses 4.1% 84%
Click to enlarge

Source: Yahoo! Finance

Now, I think that this is a useful approach - you have to start somewhere and these are all solid companies whose business is easy to understand who have been paying dividends for some 20 to 55 years. You may not get rich quickly with this selection, but at least you will be able to sleep at night.

Personally, however, I might have chosen MacDonalds (NYSE:MCD) over PG or JNJ, as it is also a dividend aristocrat and a long-term keeper. I might also have thought about 3M (NYSE:MMM) as a diversified company outside consumer staples. Despite my preferences, this is a great starter portfolio and worth measuring against our dividend bearing ETF portfolio:


Funds in this portfolio

REAL ESTATE (NYSEARCA:ICF) iShares Cohen & Steers Realty Majors
Emerging Market (NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF
US EQUITY (NYSEARCA:DVY) iShares Dow Jones Select Dividend Index
US EQUITY (NYSEARCA:VIG) Vanguard Dividend Appreciation ETF
High Yield Bond (NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd
Click to enlarge

Portfolio Performance Comparison



1Yr AR

1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate -0% 2% 0% 10% 76% 8% 59%
Five Stocks for the Timid Investor 3% 9% 54% 17% 119% 5% 23%
Retirement Income ETFs Strategic Asset Allocation Moderate 5% 5% 12% 18% 138% 3% 11%
Click to enlarge

Well this is pretty respectable growth behavior even through the tough markets. There has been steady growth and the dividends can be taken for income instead of being reinvested, so this can work for those who are looking for long-term growth as well as those needing short-term income. See charts below:

Three-Month Chart

One-Year Chart Three-Year Chart Five-Year Chart

The timid investor may also be a lazy investor in the sense that he wouldn't want to continually be reviewing and balancing the portfolio. The ETF portfolios are rebalanced at least quarterly (which is a good practice), but the stock portfolios are fire-and-forget. I think you could add a number of the dividend aristocrats to provide great diversification, but this is certainly a good start (Click for a portfolio comparison).

Disclosure: I am long MCD, MMM.

Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.