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A Stock Pick vs. Strategic Investing

An important factor to consider with any stock pick is the potential for the investment to make money, or lose money. A stock can go up or it can go down. A strategy on the other hand can be designed to move with the current of the market.

Furthermore you may consider multiple strategies. I offered one to consider recently, Strategic Investing In Equity And Debt: Target 2042.

Let's call this strategy Diamond in the Rough:

StocksSharesSecurity PriceCostDividend per share / year
Tiffany & Co. (TIF)1268.46822$1.16
Kroger (KR)1223.27279$0.46
Bonds

President & Fellow Harvard College 5.625% 10/01/2038

(CUSIP 740816AD5)

1129.0012903.86% yield
Income Funds
Guggenheim Build America Bonds Managed Duration Trust (GBAB)1222.09265$1.54
Nuveen AMT-Free Municipal Income Fund (NEA)1214.75177$0.84

This investment totals 2,833 dollars (and 40 dollars in commissions.) Notice this composition is for a non IRA brokerage account, however in an IRA you would replace Nuveen AMT-Free Municipal Income Fund with a taxable fund.

Let's look at this composition over a 5 year period of time:

StocksSharesDividendYearsTotal
Tiffany & Co.121.16569.60
Kroger120.46527.60
Bonds
President & Fellow Harvard College 5.625% 10/01/2038156.255281
Income Funds
Guggenheim Build America Bonds Managed Duration Trust121.54592.40
Nuveen AMT-Free Municipal Income Fund120.84550.40

*Note: The dividend totals do not factor reinvested quarterly increases in dividends, since future stock prices can not be calculated.

For the purposes of this example let's reinvest the dividends on Tiffany, Kroger and Nuveen then set Guggenheim to pay cash. This way the commissions will be recovered and more cash will be generated.

In this strategy I want to diversify into Yahoo (YHOO) and Wal-Mart (WMT). If Tiffany or Kroger goes up enough (like 50 dollars profit,) sell 6 shares, though less likely, if the Income Funds go up enough do the same. You could also deposit 500 more dollars in cash sometime in the next 12 months.

(For example last month I built a new small account with 18 shares of two companies and 4 Income Funds. One of the companies went up over 3 dollars a share on an earnings report, I sold it and picked up two more stocks [all different from the stocks and funds mentioned here.] With a dozen shares in this portfolio the stock would need to go up more, however there's less risk.)

Next year the Diamond in the Rough portfolio may look like this:

StocksSharesDividend
Tiffany & Co.6.21.16
Kroger12.30.46
Wal-Mart41.59
Yahoo120.00
Bonds
President & Fellow Harvard College 5.625% 10/01/2038156.25
Income Funds
Guggenheim Build America Bonds Managed Duration Trust121.54
Nuveen AMT-Free Municipal Income Fund12.70.84

Benefits & Risk Reduction

This layered position is the result of 7 stock trades and 1 bond purchase. If Tiffany goes down instead, hold it while your dividends accumulate more shares, then diversify into Wal-Mart and Yahoo from the Guggenheim dividends and Harvard income (and possibly a small additional deposit.)

Instead of one stock pick you now have a template strategy to work with. The hope here is to build profit by investing in companies that produce shareholder value.

Diamond in the Rough

Crown Jewel
Tiffany & Co.

Tiffany has had a great run in the past year, however is $15 off its 52 week high of 84.49. Gold has skyrocketed and while this makes it more expensive for Tiffany to make jewlery, the company compensates by employing top designers (Paloma Picasso & Frank Gehry) to produce lines that inspire & attract customers.

Qatar's soverign wealth fund recently aquired a 5% ownership in Tiffany. I see a very valuable company with 8.6 billion Market Cap and an acceptable level of debt, 442 million in cash and 712 million in debt. However the key to this strategy is to have the remaining positions support the crown jewel.

The Crown
Kroger

Kroger brings this portfolio down to earth. Kroger's 3,500 locations include 1,000 gas stations and 348 fine jewlery stores. Though Tiffany's jewlery will not be found in Kroger, the company employs 339,000 people and caters to a large cross-section of America.

The Kroger Company has 188 million in cash and 8.2 billion in debt.

Wal-Mart

Wal-Mart is Goliath to Kroger's David. The company has a history of building shareholder value. 4-6 shares will not yield much of a dividend, however the company should provide a strong foundation.

(If you already own Wal-Mart and want to employ this strategy for a Savings (College, Health or Charitable) account you could transfer a half dozen shares from your primary position.)

Yahoo!

Yahoo! is a low priced technology stock, that is a Value counterpoint to Wal-Mart's Growth. Yahoo! is a centerpiece of the internet providing content and a platform for marketplaces.

Yahoo! has 2.2 billion dollars in cash and 132 million in debt.

Bonds
President & Fellow Harvard College 5.625% 10/01/2038

The Harvard bond is rated AAA by S&P and Moody. It will generate 1,100 dollars profit over 25 years. This money will pay for commissions, and possibly for another stock or Income Fund down the line.

Income Funds
Guggenheim Build America Bonds Managed Duration Trust

Guggenheim's Build America Bond fund is trading at a 3.8% discount to its NAV. The Obama administration developed these Bonds to reinvigorate the economy.

Build America Bonds are taxable and are not US Treasuries. They are Federally subsidized Muni Bonds. (link to treasury.gov Recovery Act, Build America Bonds)

Nuveen AMT-Free Municipal Income Fund

The Nuveen AMT-Free Muni. Income Fund is not taxable. It trades at a 2.9% discount to its NAV. This income fund trades on AMEX and has a 0.07 cent per share monthly distribution (5.69% yield.)

Income generated will not be subject to the Alternative Minimum Tax. Check the holdings and keep in mind 12 shares will start by generating 10 dollars a year.

This completes the strategy.

Ten Year Income Calculation

With this small investment of 3,000 or 3,300 dollars you will begin to make 100 dollars a year. That's about 3% to begin with, because of the spectrum of different holdings. Comparatively a 10 year US Treasury currently yields 2.095%.

An interesting article to read that presents the argument against Tiffany is: Should You Buy This Museum Called Tiffany?

Mr. Rosenman compares Tiffany to Apple (AAPL). As much as I like Apple, it's an entirely different company. For now I'd consider 3,000 dollars into a strategy such as this over 5 shares of Apple.

In the long term Apple may still be undervalued, however in the nearer term I believe Tiffany is further undervalued. Though just in case you can't find the diamond out there, you've created a portfolio that will support the search.

Source: Tiffany & Co.: Dividend Diamond In The Rough

Additional disclosure: I have no position in GBAB or NEA however may initiate positions.