1 More Stock For New Investors: Wells Fargo

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 |  Includes: MCD, PG, WFC
by: MyPlanIQ

I recently reviewed an article by Motley Fool's John Maxfield on Procter & Gamble (NYSE:PG) 1 stock for new investors, which offers consistent, albeit slow, growth and rewards investors with a dividend every quarter. Today, I look at an article by Maxfield's colleague John Grgurich who recommends Wells Fargo (NYSE:WFC), a big bank that famously kept its nose clean during the financial crisis, and has just turned in rival-crushing, fourth-quarter results.

Sooner or later, increasing exposure to banking stocks might be a good idea, and WFC has been touted by Warren Buffet as a long-term winner. While reviewing Maxfield's article, I approached the issue with a preference for MacDonald's (NYSE:MCD).

Company Years of Dividend Graham Ratio
Wells Fargo & Co. 20 39.97
Procter & Gamble Co. (PG) 55 61.21
McDonald's Corp. 71 143.47
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I included the Graham number to give some sense of the premium paid for each stock. I hasten to add that we live in days where safe income generating stocks are valued, and this is reflected in the premium, which doesn't necessarily mean the stock is overpriced.

Thus we have a selection of three strong companies, all of which deliver good dividends. Why not take a closer look all three and see how they compare with our benchmark ETF portfolio?

Asset Fund in this portfolio
REAL ESTATE (NYSEARCA:ICF) iShares Cohen & Steers Realty Majors
CASH CASH
FIXED INCOME (NYSEARCA:TIP) iShares Barclays TIPS Bond
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
INTERNATIONAL EQUITY (NYSEARCA:IDV) iShares Dow Jones Intl Select Div Idx
High Yield Bond (NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd
INTERNATIONAL BONDS (NYSEARCA:EMB) iShares JPMorgan USD Emerg Markets Bond
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It's important to note that the ETF portfolio requires monthly or quarterly rebalancing. whereas with stocks, no such effort is required. In all cases, the dividends are reinvested:

Portfolio Performance Comparison

Portfolio/Fund Name YTD
Return
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
MCD 34% 38% 123% 25% 104% 21% 89%
Retirement Income ETFs Tactical Asset Allocation Moderate 0% 1% 22% 9% 78% 8% 59%
3 All Star Stocks 4% 19% 108% 25% 120% 9% 33%
PG 7% 15% 55% 17% 23% 4% 14%
WFC 25% 9% 19% 32% 70% 2% 2%
Click to enlarge

While this article aimed to look at Wells Fargo from the point of view of a company with which to re-enter the banking sector, HSBC with its large Asian exposure may have been another company we would have considered to provide global balance. In any case, the company's performance is okay by us, and given the banking challenges, it may be time to take on a bank that is solidly in main street.

Once again, MacDonald's has posted great performance in terms of actual and risk-adjusted returns - beating the broadly diversified ETF portfolio. MCD was my entry into stock ownership (apart from stock options, Mutual Funds and ETFs), while PG offers solid returns. A combination of all three - WFC, MCD, and PG - is decent, but I would think I would want more stocks than just the three to provide a little more balance.

Three-Month Chart (PG is in Blue)

One-Year Chart (PG is in Blue)

Three-Year Chart (PG is in Blue)

Five-Year Chart (PG is in Blue)

I believe in diversification and so I am happy to see that the three stocks just beat out PG over the five-year period, even though MCD is well ahead. I owned MCD already, and have recently purchased Wells Fargo.

Disclosure: I am long MCD, WFC.

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.