A month or so ago, I posted an article outlining my portfolio’s holdings. Obviously, these are my favorite stocks in the market (which is why I own them), but I realize that many investors aren’t interested in managing portfolios comprised of ~70 holdings. In a piece I published a week ago, a reader asked that I put together a “wish list” of sorts, regarding my top 10 or 20 stocks. I had some time this weekend, so I decided to acquiesce.
Just this week, the markets set a record for the longest bull market run. As the old adage goes, old age doesn’t kill bull markets. But even so, I think it’s safe to say that we’re in a late cycle environment and when putting together a list attempting to look 10 years down the road, I assumed that it is likely that we’ll experience a bear market between now and the end point of this project.
With this in mind, I’ve done my best to select companies with strong secular tailwinds. It’s impossible to do anything but speculate when peering so far into the future, but macro trends with secular growth prospects add an extra layer of defense. These names will likely fall alongside the rest of the market in the event of a bearish event, but I think, for the most part, their growth narratives will remain intact regardless of the broader market’s health. Assuming I’m right, this should lead to outperformance over the long-term.
I should also note that while I always think that valuation is important, when looking a decade down the road, I thought it made more sense to focus on growth potential. As you’ll see shortly, I didn’t pick and choose stocks with crazy, triple digit P/E ratios, but this list does include names that I’m not interested in buying in the present because they appear to be overvalued.
The risk profile of this portfolio is a bit higher than my own on the whole. I didn’t include any of the established divided aristocrats that form the bedrock of my personal portfolio because the idea with this piece was to pursue growth (albeit, in a relatively conservative manner). For the most part, I stayed true to my dividend growth roots with this list, but I’m looking to target the dividend aristocrats of tomorrow.
With this in mind, let’s get into the list.
Up first, we have Apple. This was an easy stock to include. It’s my largest position by far, because of several reasons. First and foremost, smart phones have essentially become the Coca-Cola’s of the present age. What I mean is every has one and feels like they couldn’t live without it. The iPhone is the strongest brand within the smart phone space. Apple has the highest hardware margins and I don’t expect this to change. What’s more, Apple is diversifying its revenue streams with services, further monetizing its massive worldwide active device count. But, what I like most about Apple isn’t its operations in the present, but its massive cash flows and the flexibility that they give the company moving forward. The way I see it, there isn’t another large cap, dividend growth company in the market can has the capability to re-invent itself in a moment of need, like Apple.
While we’re on the subject of cash flows/cash hoard, why not transition to Microsoft. With Apple saying that it plans to go cash neutral on its balance sheet, that leaves Microsoft as the next likely candidate to take the throne as the most cash rich company in the world. MSFT doesn’t have the ~$270b of cash on hand that AAPL does, it did have a very impressive $133.7b of cash, cash equivalents, and short-term investments at the end of the last quarter. This cash gives Microsoft the same flexibility to grow moving forward that I discussed with Apple. Microsoft is also a leader in the fast growing cloud space, the video gaming space, social media, and the A.I. market. What’s more, it still has significant legacy cash flow coming in from its software division. Under CEO Satya Nadella, Microsoft has become a well diversified technology powerhouse with growth engines left and right. What’s not to like?
Sticking with the Silicon Valley powerhouse theme, let’s go to Alphabet. GOOGL is the only company on this list that doesn’t pay a dividend. Alphabet is known for its Google search engine. The Google family of offerings still generates ~90% of Alphabet’s revenues, which is a bit concerning in terms of the diversification of its revenue stream, but GOOGL isn’t just a digital ad company. It’s become a leader in the cloud space. Instead of paying a dividend, GOOGL has invested heavily in more speculative bets, several of which could be paying off handsomely in the near future. GOOGL’s Waymo division, for instance, is thought of as a leader in the autonomous vehicle space. GOOGL’s software makes it a leader in the automation/A.I. space in general, which is exactly where I want to be as an investor looking out over the long-term horizon. GOOGL is also doing interesting work in other significant markets, such as healthcare. I also view it as a potential leader in digital security. When it comes to technology, GOOGL appears to have its hands in a wide variety of cookie jars and when it comes to long-term success, this is exactly what I like to see.
And finally, we come to the last pure play technology company on the list, NVIDIA. Right now, NVDA is a leader in the fast growing video gaming industry, but I think that’s just the start. NVDA’s CPU chips have found a home in data centers worldwide, which is also an industry with secular growth behind it. Lastly, and probably most importantly to my long-term bullish thesis here, is NVDA’s leadership in the automation/driverless car market. I suspect that the transition from driven cars to driverless vehicles will be one of the greatest transformative developments for society in the decade(s) to come and NVDA seems poised to profit from this shift. NVDA is probably the expensive stock on this list in terms of valuation (I strongly considered including Amazon (AMZN) as well, but it’s valuation is simply too speculative at this point and while I’m long the stock personally, I think it carries too much risk to include in a top-10 list), but I still think the stock has massive upside for those willing to stomach the share price volatility.
I suppose that you could say that Boeing is a technology company (BA is building rockets to put man on Mars, for goodness sake); however, I’m going to continue to view them as an industrial/transportation company. With that being said, the globalization/urbanization macro trends that Boeing benefits from might be just as strong as the A.I./automation trends that drove a lot of my tech picks. The world has seemingly insatiable demand for airplanes. Since Boeing operates as a part of a duopoly in this field, this bodes well for them. This company has a backlog of nearly $500b. Sure, there is speculation of Chinese competition entering the market, but I think that’s likely a decade or so away, at least, from really putting any major pressure on Boeing. In the meantime, BA will continue to post massive cash flows and return large chunks of change to its investors. What’s more, BA has recently focused on improving its margins via a service segment that continues to post nice growth. This should not only continue to drive demands for its products, but also increase the switching costs for customers. Being a cyclical company, Boeing does run the risk of dividend freezes, or even cuts, in bear markets. With that said, I don’t worry about the income that I receive from Boeing. This company has posted a dividend growth CAGR of ~14% dating back to the year 2000. That works well for me.
We’re moving away from the tech trades, but DIS still benefits from much of the same tailwinds. As the undisputed king of content (especially once the Fox deal closes), I think Disney is really going to benefit from the ongoing automation trend. As automation increases the efficiency of human society, free time should be on the rise. That will increase the demand for entertainment and experiential retail. Disney offers both in spades. I picked DIS for this list instead of Netflix (NFLX) because of its more diversified business model, its long history of in-house content production, its massive content library, and its much cheaper valuation. Although Disney had been pretty late to the game in terms of over the top streaming offerings, I think it’s good that they’re finally moving strongly into the space with their ESPN app and the OTT services expected to launch over the next 12-18 months. It’s also worth mentioning that Disney will likely have a large stake in Hulu after the Fox deal closes. It might be a bumpy ride as the traditional media landscape continues to evolve into one that primarily revolves around streaming, but long-term, I really like Disney.
Technology has been a trend throughout this list. I don’t really consider Nike to be a technology company, though I do think they are one of the world’s leading material science firms. Nike’s innovative fabrics have evolved over time to enhance both performance and comfort. Looking ahead long-term, I suspect that the world will have a more intense focus on enhanced productivity and Nike will benefit from this. We’ve already seen times changing with regard to performance/comfort being prioritized over traditional dress wear that might not have been as practical. Worldwide, Nike’s brand name is strong, representing quality, and even wealth, to a certain extent. In a world where demand name branded goods is declining, I think Nike’s swoosh remains strong. Macro trends aside, I also think that Nike is setting itself up to be a dividend growth superstar over the coming decades. The company has an established history of strong, double digit increases. Since 2002, Nike’s dividend growth CAGR is a very impressive 16.6%. Even after all of this dividend growth, NKE’s payout ratio is in the 30% range. This company has plenty of room to grow its dividend and I fully expect it to be a dividend aristocrat in the future.
Starbucks is my consumer staple-esque name on this list. I realize that SBUX is more of a consumer discretionary company, but in this health conscious world, I believe that coffee will continue to be more popular than Soda as the go-to caffeinated beverage of the energy deprived individual. I’m a big fan of investing in companies that legally sell addictive substances. Demand for tobacco based products appears to be falling, but that isn’t the case for caffeine. I view SBUX as the McDonald’s (MCD) of the millennial generation. I think this is a dividend aristocrat in the making. Since initiating its dividend its dividend, SBUX has a strong history of double digit annual growth. The company recently increased its dividend by 20%. Although SBUX has become known for 20%+ dividend growth, I wouldn’t be surprised to see its DGR slow in the relatively near future. This is bound to happen as the company matures. However, right now SBUX yields close to 3% and even if it only averages 10% dividend growth annually over the next decade (which I believe to be a conservative estimate), we’re still talking about some wonderful compounding going on here.
When I was thinking about putting this list together, I wanted to stay fairly diversified. I knew I wanted a financial stock on the list and ended up having a hard time choosing between J.P. Morgan (JPM), which is my favorite big bank, offers a cheap valuation, and a relatively high dividend yield, Berkshire Hathaway (BRK.B), which essentially speaks for itself as a highly diversified holdings company with incredibly strong cash flows and leadership, and the two main credit card companies, Visa and MasterCard (MA). I crossed J.P. Morgan off of the list because while I think it will benefit from rising rates and lower regulation in the short-term, I still worry about how it will fare during the next recession. I crossed Berkshire off of the list because I’m not super bullish on the insurance industry moving forward (I suspect that climate change will continue to cause problems for the those companies), because it doesn’t pay a dividend, and although this is a bit morbid to say this, because Warren Buffett isn’t getting any younger and I suspect that at some point during the next decade he will no longer be calling the shots for this company and I think that could cause Berkshire to lose some of its luster amongst investors. This left me with the two credit card names, which essentially act as toll booths in the global digital payment market. I think both names are great and it’s difficult to choose between the two operationally. I think both names will be dividend aristocrats one day. However, I decided to make my decision based on the current valuation, which favored Visa as the cheaper option of the two.
W.P. Carey (WPC)
When I put together lists like this, I always like to include a high yielder or two. In the past, AT&T (T) has usually been my go-to name in the high yielding space; however, since I already included Disney on this list, I decided to go with my favorite REIT, W.P. Carey, which sports a slightly higher yield than AT&T, at 6.2%. I like WPC so much because of its well diversified portfolio. Unlike other well known triple net REITs, WPC isn’t constrained by geological limits or the industries of its tenet base. WPC is a global REIT that owns properties spanning a variety of industries, from retail, to industrial, to office, to warehouse, and self storage. I nearly went with Brookfield Infrastructure Partners (BIP) in the high yielding slot because of that company’s diversified revenue streams, but WPC’s yield is much higher than BIP’s ~4.5%. BIP probably offers better dividend growth prospects than WPC, but that’s okay. With this list, I’ll get my dividend growth elsewhere. In my opinion, WPC offers a safe, stable 6%+ yield, with low single digit annual dividend growth prospects, with attractive total return prospects to boot as management focuses more on becoming a pure play triple net REIT, which should increase the quality of its income, garnering it a better credit profile, and eventually, spurring multiple expansion to levels on par with the other large cap triple net players in the space.
Disclosure: I am/we are long AAPL, MSFT, DIS, NKE, WPC, NVDA, GOOGL, BA, SBUX, V, MA, JPM, BRK.B, BIP. 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.