What if you had to place your financial future in the hands of 10 companies?
Obviously safety and longevity and perhaps a wide moat would become the main considerations.
An investor would also have to factor in their life situation and home currency vs. a currency hedge.
I would look for potential longevity in the US and Canada.
It's a question that gets thrown around mostly for fun. "What if you could only own one stock?" "What if you could only hold 10 companies?"
And certainly it's often for good "fun," but our answers are more than telling. We might get a sense of where our trust lies and if our actual investment's core and intended strategy is in place.
First off, for this "fun" exercise, I will use my current and real-life situation. I am 56 years old, and I currently may need to rely on my portfolio for income. My readers will know that I left my full-time work behind in June of 2018 to launch my new website and to do some freelance writing and training "here and there".
While I recently bought a stock for the first time in a year, I do not know the degree to which I will need to rely on my personal portfolio. These 10 companies will have to do the job of protecting my personal wealth and have the ability to deliver a nice combination of current dividend income and total return potential. At the core of course is the quest for long-term financial health.
I already own a concentrated portfolio, so this exercise is not all that far from my current reality, though we are certainly going to do some chopping or perhaps even some shopping for a new company or two. And for my Canadian companies, I have recently taken the market risk out of the mix and replaced that with a healthy dividend growth rate.
Currently I own seven Canadian Wide Moat Dividend Growth companies. I would simply remove one company, TransCanada (TRP), leaving me with the biggest Canadian banks by way of Royal Bank (RY), Toronto-Dominion Bank (TD) and Scotiabank (BNS), and two of the largest Canadian telcos by way of Bell Canada (BCE) and Telus (TU), and one energy/pipeline company Enbridge (ENB).
The Canadian market, which is not well diversified, offers some unique oligopoly situations with respect to banking and the telco space. The companies are protected by regulators and embraced by consumers. There is little competition in the space. The Canadian banks are praised as the best-run banks on the planet. US and international telcos have already sniffed around the Canadian market and have taken a pass. When they do come in (think Virgin), they are then gobbled up, or put up for sale or merger. Virgin Mobile is now part of Bell. I personally have contracts with Bell and its "discount" provider brand Virgin.
I would simply pick Enbridge over TransCanada as it has acquired incredible assets in the US and it operates the longest pipeline system in the world. Yes, there is risk with oil being "replaced" over the coming decades, but perhaps with the extensive natural gas pipelines, the company could continue to execute well for decades to come. North America is likely not moving off traditional energy sources just yet.
Those six Canadian companies in equal weight fashion would offer a current yield of 4.8%. And as per the above article link, the dividend growth rate is in the area of 9%. I would certainly hope for some capital appreciation over the coming decades as well. It's not well known, but the big Canadian banks even beat Warren Buffett for total returns.
My US holdings start with a Buffett of stocks
For our US stock holdings, I skimmed 15 of the largest-cap Dividend Achievers back in early 2015. Please read Buying Dividend Growth Stocks Without Looking. I also have three US picks by way of Berkshire (NYSE:BRK.A) (NYSE:BRK.B), Apple (NASDAQ:AAPL) and BlackRock (NYSE:BLK).
Out of the gate, the most obvious pick for my money is Berkshire. And yeah, that's cheating. One could argue that with Berkshire Hathaway, you are essentially able to own a concentrated fund run by the world's greatest investor with zero fees. I offered that up in this article that centered around some Buffettisms and his investment philosophy. Here's Investment Lessons From The World's Greatest Investor.
That's a no brainer in my opinion if one is looking for the greatest diversification available by entering one ticker symbol. Of course, for this exercise, we are only allowed to own companies, not ETFs. From late last year, here is the concentrated portfolio of publicly traded stocks.
Of course, Berkshire also holds many companies outright. With Berkshire, you have a combination of private equity, unique income arrangements, an insurance float, and those public holdings.
Of course, the "risk" of owning Berkshire Hathaway is the longevity of Mr. Warren Buffett and his right-hand man (and older lieutenant) Charlie Munger. That said, Mr. Buffett often suggests that he holds a stable of companies that he could hold for 10 years or more should they shut down the stock markets.
With my 10-stock exercise, I am certainly closing the stock markets for selling for a decade or three. I would trust the current holdings and the new managers who will take over after Mr. Buffett and Mr. Munger.
In a nice stroke of irony, Mr. Buffett has taken care of my Apple pick. Outside of fund managers such as Vanguard and BlackRock, we're the largest shareholders of Apple. No need for me to replicate that offering. I will take a pass on BlackRock due to the incredible disruption in the fintech space.
US Stock #2 - JNJ
To begin, let's talk about Johnson & Johnson's business model. Johnson & Johnson is a diversified health care company and a leader in the area of pharmaceuticals (~49% of sales), medical devices (~34% of sales) and consumer products (~17% of sales). Johnson & Johnson was founded in 1886 and employs more than 125,000 people around the world. The company generated more than $76 billion in revenues in 2017.
Johnson & Johnson is a well-known dividend stock because of its compelling track record of dividend growth. With 55 years of consecutive dividend increases, Johnson & Johnson is a member of the Dividend Aristocrats, a group of elite dividend stocks with 25+ years of consecutive dividend increases.
JNJ is simply a well-diversified global healthcare conglomerate. The company operates in a space with the obvious positive trend of aging world population in developed nations and the need to spend more on healthcare solutions. Certainly, management has to execute well, but it has done that in the past, and it is a unique Dividend King. I like the odds of a continued repeat.
Sure Dividend concludes with:
While not exactly a surprising outcome, a deep dive into Johnson & Johnson's financial reveals that the company's dividend is well-covered by any fundamental measure of financial strength.
US Pick #3 - Walmart
Yes, this may not be a popular suggestion, but remember I am looking for the greatest potential stability and longevity, not market-beating returns or even great growth. Walmart has that wide moat by simply owning the low-price retail space. It has more than answered the e-commerce challenge. I also like the fact, as Sure Dividend points out, Walmart can be somewhat recession resistant.
This is certainly not a company with incredible growth prospects, but it continues to execute in North America and around the globe. This is another Dividend Aristocrat (NOBL) and might soon find its way onto that list of Dividend Kings.
US Pick #4 - Running with Nike
Yup, for me as a former ad and brand guy, I will identify an incredibly strong brand with a wide moat. Consumer and brand loyalty can equal continued sales success. In the land of consumers, Nike is an elite company along with the likes of Apple, Microsoft (NASDAQ:MSFT), Toyota (NYSE:TM), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), McDonald's (NYSE:MCD), and Coca-Cola (NYSE:KO).
This would give the portfolio a little growth kicker and some wonderful international diversification.
If I am allowed to rebalance from a company with a lesser moat to a company with a greater moat, I would certainly trim some profits off of Nike and move those funds to one of my Canadian holdings or to Berkshire or Walmart, which have a potentially greater moat. I might only need Nike to "do its thing" for another decade or so. It might allow more near-term profits that can be moved to more "safer harbors". That said I like the potential of Nike to become one of the most durable brands of the century. Who knows? It's certainly a big guess, and a risk.
The US Portfolio
Certainly one could argue survivorship bias, but here is the five-year-plus return history vs. the S&P 500. A slight market beat with lower volatility. I did not pick these stocks for growth, other than Nike, but here you go.
And moving through the recession from 2007. Certainly considerably more survivorship bias exists.
Thanks for reading. This is an interesting exercise. If you had to place your financial future in the hands of 10 companies, where would you turn?
Please leave a comment, or three.
Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.
Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, ABT, BLK, WMT. 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.