One year ago I published a piece here at Seeking Alpha titled, “My Top 5 Dividend Stocks For Young Investors”. As a young investor myself, I had a lot of fun putting that piece together. What’s more, the positive feedback I received, from young investors just getting the compounding process started and older investors who were either interested in growing their personal wealth or passing the piece along to a loved (younger) one, was amazing. That piece generated a lot of commentary and I felt like I really made a difference for certain readers out there. So, now that a year has passed, I wanted to re-visit that piece to see how the picks were doing and, with the benefit of hindsight, wonder if I would have done anything differently.
So, for those of you who missed the original piece, here’s a short recap. I created a hypothetical situation that was loosely based upon several conversations that I’d recently had with friends and created a quick and easy portfolio in response.
“The investor has $25,000.00 saved up and has decided that the meager interest being generated by his/her savings account isn’t getting the job done. He/she realizes that the market is hovering near all-time highs and fears that the current bull market is rather mature, but still understands that over the long term, the stock market has proven itself, again and again, to be the best wealth generator available. This investor has avoided putting the money work in the markets for over a year now, waiting for a pullback. He/She is becoming impatient and has decided that due to his/her long-term time horizon it’s more about time in the market, rather than trying to time the market, and now is the time to take the plunge.”
“Even though he/she is young, he/she doesn’t have the stomach for some of the high flying momentum driven stocks of the day; he/she is intrigued by their growth potential but ultimately understands that there is no such thing as a free lunch and get rich quick schemes are likely too good to be true. He/she wants to begin building a balanced, well-diversified portfolio with his/her twenty-five grand. He/she plans on adding to this foundation on a regular basis moving forward on his/her journey towards eventual (hopefully) financial freedom. And last, but certainly not least, he/she is drawn to the idea of dividend growth stocks. He/she understands the power of compound interest and hopes to eventually live off of his/her dividend income stream so that he/she never has to touch his/her principle, which could serve as a part of his/her legacy to his/her future family when he/she is dead and gone. This idea gives him/her peace of mind, knowing that loved ones will be taken care of by the portfolio he/she has built long after he/she is able to provide for them.”
So, with this situation in mind, here’s the portfolio that I created.
|Company||Ticker||Shares||Cost Basis||Original Value||Current Share Price||Current Value||Dividends Received||Total Return|
Wanting to keep things simple, I decided to divide that $25,000.00 into 5 even weighted portions and make “purchases” all at long. Knowing that the young investor in the hypothetical has his/her entire life out in front of them, I decided against dollar cost averaging when making the initial buys. The young investor in question would be able to add to these positions or create new ones moving forward with the savings generated by their pay checks as they gained familiarity with the markets.
Although I personally wouldn’t feel comfortable with such high single stock exposure weightings in my personal portfolio, I knew that 5 stocks would create an easily manageable load for a young professional in terms of ongoing portfolio monitoring. My friends aren’t portfolio managers like I am and have other passions professionally.
With that in mind, I did put my money where my mouth is when putting this sample portfolio together. Apple and Disney are my #1 and #2 weighted holdings, respectively. AT&T is my 4th largest holding. Nvidia is my 6th largest holding. And wrapping up the portfolio picks, Nike is my 11th largest holding.
I prefer a much broader basket of holdings, but as it turns out, picking just 5 high quality dividend growth names is all one needed to do to significantly beat the market over the trailing 12 months.
The S&P 500 has performed well since the original article was published on July 18th, 2017, up 14.45%. I think any investor, young or old, would be quite pleased with that sort of double-digit performance over any 12-month period of time. Thankfully, the portfolio I put together in that piece performed even better though, up 23.43% over the last 12 months.
This portfolio also proves that you don’t have to get them all right to do well in the markets. Four of the five picks performed extraordinarily well over the past year, with Apple, Nike, and Nvidia all posting strong, double-digit total returns. Both Disney and AT&T underperformed the broader market, but their peers in the portfolio picked them up and created alpha all the same.
AT&T was the worst performing pick by far. It was the only one of the group that posted negative performance on the year. Thankfully, when you own high quality names bolstered by reliable dividend yields, sell-offs oftentimes aren’t as steep as they might be elsewhere in the market. What’s more, T’s ~6% dividend yield canceled out a lot of the losses that this position generated for the portfolio. When investing in individual equities, you’re bound to win some and lose some. However, when your worst investment posts -8% performance, you’re likely to have a pretty good year.
One thing that I wanted to do while finishing up this piece is sit back and reflect upon my picks. With hindsight, would I do anything different? And, moving forward today, would I buy into a different set of 5 names if I had $25,000.00 sitting in the bank and wanted to invest it in equities? In short, the answer (albeit a difficult conclusion to come to) was no.
I was thinking about putting together a new set of 5 holdings for this year, but honestly, looking at this list, I’m not sure if I would replace anything. There are certainly other stocks in the market that I’m considering buying in the present, but as far as high quality long-term buy and hold names go, these 5 names come together to form a powerful portfolio that provides upside via secular growth, reliable income/income growth, and defense against bear markets via strong balance sheets and low valuations.
I really like these five names. Sure, it’s easy to say I would have liked to take out Disney and AT&T and add in other names that performed better, but no one has a crystal ball. I think that the long-term investment thesis behind each and every one of these picks remains in place and I look forward to holding them all over the long term.
I would really like to include Microsoft (MSFT) and Starbucks (SBUX) in this portfolio. Those two companies, alongside Visa (V),Mastercard (MA), and Boeing (BA) are no-brainer long positions for younger investors, in my opinion. Both Visa and Mastercard are expensive, though.
Microsoft is trading well above its long-term averages, but at ~27x TTM earnings. However, that’s still well below the ~32x multiple that V trades at and the nearly 37x multiple that the market has placed upon Mastercard. Boeing is also trading at ~27x its TTM earnings at the moment, though its earnings are much more cyclical in nature than MSFT's and I think the stock deserves a relative discount because of this. I would argue that V, MA, and BA all have better growth prospects than MSFT, but MSFT has one of the best balance sheets in the world and a significantly higher yield than the two credit card names that should allow it to outperform in a bear market scenario.
Starbucks also looks very attractive to me with a ~3% yield. It’s difficult to find another company with such a high yield and the strong, double-digit dividend growth prospects that SBUX brings along with it. I recently bought SBUX at $47 myself, but when looking at the five companies that were on the original Top DGI Picks for Young Investors list, I couldn’t find anything that I wanted to replace.
Sure, SBUX (and MSFT, V, and MA, for that matter) have much better growth prospects than AT&T, but I think it’s important to maintain yield diversification and AT&T is the only high yield play in this portfolio. In a strong bull market, having a slow grower with a ~6% yield might not sound like much, but I think companies like AT&T can serve as anchors during bear market scenarios. AT&T is already trading at a generational low multiple; I don’t see it getting much worse. Actually, I think this stock has 20%+ upside in the short term once all of the M&A related headwinds blow over and the market re-focuses on the company’s fundamentals, cash flows, and yield.
As always, I want to open up the floor here for the SA community. As a young investor myself, I learned quite a bit from fellow contributors and commenters here at this site. A year ago, when I published the original piece that this is responding to, there was a lot of feedback and I was happy to see that the article and the comment section attached turned into a valuable resource for self-directed investors looking to get their portfolios started. I’m sure that this piece can serve a similar function. What’s more, I’m always looking for more names to research and potentially add to my watch list. I’m looking forward to hearing what everyone else’s top DGI names for young investors might be.
Disclosure: I am/we are long AAPL, NKE, DIS, NVDA, T, SBUX, MSFT, V, MA, BA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.