The Everyday American Portfolio Experiment

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 |  Includes: ABT, CVX, EXC, GIS, GLD, INTC, JNJ, KO, MCD, MRK, MSFT, PEP, PG, SO, T, TGT, VZ, WMT, XOM
by: J Mintzmyer

I very rarely agree with the trading ideas of Jim Cramer; however, when I decided to watch an episode of Mad Money last night (watch video here), I found myself in agreement with several key points. Primarily, there are several strong investments right under our noses. As Jim went through his "morning routine," I found myself nodding in agreement to the virtues of an investment in Johnson & Johnson's (JNJ) 3.6% dividend yield, Pepsi's (PEP) massive food and beverage arsenal, or commodity-drop play General Mills (GIS). These stocks all three boast dividend yields of over 3%, have steadily increased payouts over the past 5 years, and have paid concurrent dividends for over twenty-five years. In addition, all three companies boast strong historical earnings and a history of share repurchases.

Run Away from Treasuries

At a time when treasuries, especially 10 year notes, are near historic lows, I believe that it is time for all long-term investors under the age of 65 to completely abandon U.S. government debt. Yes, even with the Eurozone crisis, weak U.S. jobs report, threatened domestic tax-hikes, and talks of a recurring global recession, I believe that the 'security' of Treasuries should be avoided at all cost.

Where To?

Definitely not gold (GLD) or cash. Gold is a bet based solely upon future rampant inflation and cash is a bet based upon rampant deflation and/or a massive stock market crash. I believe that inflation will occur at a significant level over the next decade, at a level high enough to eat away at the purchasing power of cash, but lower than the amount that is already priced-in to gold. I believe that the international markets are too risky for a conservative investor and that growth stocks could easily falter if a persistent global recession strikes. Corporate bonds are intriguing, but if inflation strikes and interest rates rise, they will suffer. Albeit, not as strongly as Treasury notes and bonds.

Domestic Blue-Chips with Dividend Growth

In my opinion, the only logical answer for the long-term conservative investor is to form a complete allocation in domestic blue-chips. High dividend yields are preferred, as these companies will "pay you to wait" for a recovery. Why would anyone choose a 1.52% yield on a 10 year treasury note when Chevron (CVX) is pumping up 3.45%, McDonald's (MCD) is frying up 3.12%, Microsoft (MSFT) is downloading 2.67%, and Target (TGT) is distributing 2.48%. These stocks also provide a bit of inflation protection that Treasuries will not offer. If prices rise across the board, eventually revenues, profits, and finally dividends, will follow.

The American Portfolio Experiment

This is a portfolio that I invite all long-term investors under the age of 65 (I'm assuming those that are 65+ will require guaranteed preservation of capital) to partake in. If you would rather simply observe the results, I will provide updates each month on the process of the portfolio. All dividends will be re-invested and shares will only be traded if a stock achieves unwarranted price appreciation.

With the simple five share portfolio, a typical investor can allocate his or her funds for less than $50 at most discount brokerages. With the ten share version, less than $100 should be required. Initiate a DRIP (dividend re-investment program) for all shares in order to avoid re-investment costs. Trades will only occur if share price experiences extreme gains (locking in gains and moving away from a small yield) or if a company's fundamentals are deteriorating (unlikely to occur from this basket).

5-Share Allocation

The following are my recommendations, and the stocks that will be tracked; however, I will include other options that should provide similar results.

  • Energy - Chevron (CVX) @ 3.45% yield (or Exxon Mobil (XOM) @ 2.73%)
  • Retail - Target (TGT) @ 2.48% yield (or Walmart (WMT) @ 2.22%)
  • Tech - Microsoft @ 2.67% yield (or Intel (INTC) @ 3.21%)
  • Food Service - McDonald's (MCD) @ 3.12% yield (or General Mills GIS @ 3.43%) (no legitimate industry alternate to MCD in my opinion)
  • Consumer Products - Johnson & Johnson JNJ) @ 3.6% yield (or Proctor & Gamble (PG) @ 3.65%)

10-Share Allocation

All of the above, plus:

  • Snack Products - Pepsi (PEP) @ 3.07% yield (or Coca-Cola (KO) @ 2.62%)
  • Consumer Products - Either JNJ or PG depending on the first choice
  • Healthcare - Abbott Laboratories (ABT) @ 3.11% yield (or Merck (MRK) @ 3.99%)
  • Telecom - AT&T (T) @ 4.95% yield (or Verizon (VZ) @ 4.5%)
  • Utilities - Exelon (EXC) @ 5.65% yield (or Southern Company (SO) @ 4.19%)

Investment Thesis

I firmly believe that this allocation (with prudent adjustments if required) will vastly out-perform any combination of cash, treasuries, corporate bonds, or gold while avoiding the risks inherent in growth stocks or international stocks over the next 5-10 years. If the recession environment continues and we suffer a "lost decade," I believe that this basket might outperform everything. Welcome to the beginning of the Everyday American Portfolio experiment. I wish you well in your future investments.

Feedback?

Are there any top-performers that I am missing? Do you believe that there are any stocks that do not belong on this list? Please feel welcome to comment and/or critique below-I look forward to the dialogue.

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Disclosure: I am long EXC, INTC, MSFT.