When discussing retirement strategies, I believe one's stock holdings should be diversified amongst 5-10 holdings (ideally 5 or 6). Any fewer, and a poor quarter from one of your companies can significantly damage your portfolio. Any more than 10, and you are over-diversified, and you may as well buy mutual funds. I recommend that none of the holdings be in the same sector, so investors need to determine how to spot the "best of breed" stocks in each sector.
As far as technology goes, I narrow down my top two to Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC). Now, there are many other good names in the sector; these are simply the most appropriate for a retirement account. Interestingly enough, the numbers 1 and 2 retirement holdings in the U.S. are Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), respectively. More on that in a future article…
I decided to backtest these two companies in a somewhat different way than I normally would. In the technology space it is important to take into account how the stocks reacted in the "bad times" of the early 2000s. So, I'll start the test in 1999. Instead of using an ideal situation, I'm assuming a $10,000 investment in each of these companies at around the worst possible time, when the tech bubble was at its peak. To be an appropriate retirement holding, a stock needs to be able to weather a storm.
For the purposes of the test, I made the assumption that all dividends were reinvested, as they should be. Most brokerages offer automatic DRIPs (Dividend ReInvestment Plans) that are commission free. Here is the data I used in my calculations, then we'll analyze the key points.
So, even though this assumes an investment at a terrible time for tech stocks, both of these companies are above the original value. They both have an outstanding track record of increasing dividends as well, with Microsoft initiating a dividend of $0.24 in 2003, and raising it steadily to its current level of $0.60. Intel's dividend in 1999 was $0.06 and it has raised it all the way up to $0.84, a 3.36% yield. However, an investment in Microsoft in 1999 would be worth $943.96 more than Intel, so in this very close comparison, Microsoft looks like the slightly better long-term prospect.