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Introduction
I did it again. I went with a title that may trigger some clickbait accusations. However, I'm not fooling anyone. I won't promise that anything you read in this article will turn you into a millionaire - or an even richer millionaire.
What I promise you is that I'll provide a lot of food for thought, as we discuss where the wealthy are putting their money and how we can benefit from it.
Every quarter, Bloomberg publishes a long article that comes with investment advice from professionals working for major banks and research institutions. They answer three key questions:
- Where to invest $10,000?
- Where to invest $100,000?
- Where to invest $1,000,000?
People interested in the answer to the third question aren't your "average" millionaires.
For example, a millionaire isn't what it used to be. A $100 in 1970 is currently worth about $12, thanks to the consistent rise in the consumer price index.
Federal Reserve Bank of St. Louis
Ramsey Solutions found that more than 50% of millionaires live in a neighborhood where the average household income is below $75,000 per year. Roughly 60% of millionaires live in a house valued under $500,000.
Moreover, the overwhelming majority got rich very slowly. According to the same source, only 5% of millionaires hit the $1 million mark in ten years or less. Most became millionaires after the age of 49.
This makes sense, as most are likely to become millionaires by consistently buying stocks and because of increasing home equity. These processes take time.
That's where the data from Visual Capitalist comes in handy. Although the data is from 2016, it is still valid. As we can see below, people who cross the $1 million net worth mark have most of their money in home equity, retirement accounts, real estate, and business interests. As we just discussed, these are the people who have consistently invested in stocks and benefitted from rising home equity. Some had investments in real estate.
Visual Capitalist
Looking at people with a net worth of $100 million and beyond, we see that most of their net worth consists of business interests, stocks, mutual funds, and real estate.
These are the people we're focusing on in this article.
After all, even the "average" millionaire does not worry about where to put $1 million at once, as only the richest millionaires have that kind of spending/investing power.
So, why should we care where these people are putting their money? After all, most people reading this do not have this kind of money. Neither do I.
This is about "big-picture" stuff. People investing large sums of money often focus on major developments, including trends with secular growth. That's what I'm all about. In fact, it's how I started my career, when I was part of a team advising a hedge fund, including a person with an elevated nine-figure net worth.
Hence, in the second part of this article, I'll show you what "smart money" is looking at. I will also tell you my view on these developments and provide dividend (growth) ideas that allow investors like you and me to build wealth over time.
In other words, we're taking ideas from professionals and refining these to fit our dividend strategies.
So, let's get to it!
Finding A Great Risk/Reward In An Uncertain Environment
I doubt I am breaking any news when I say this is a challenging investing environment. Although the S&P 500 is back at its all-time high, there are many factors an investor needs to keep an eye on.
- Economic data is coming in mixed, including weakening consumer sentiment (at already low levels), a sub-50 ISM Manufacturing index, rising delinquencies, etc.
- The AI-fueled tech rally has lost its momentum.
- Geopolitical risks are elevated.
- The U.S. election adds even more political uncertainty.
Bloomberg
While these developments may make some investors very uncomfortable, they also come with opportunities.
Idea 1: Broadening Market Strength
I have to say, it's great for my ego when "smart money" discusses ideas that we have been discussing for months. This includes broadening market strength, something I have hinted at in articles like this one. In that article, I discussed the high likelihood of broadening market strength after the S&P 500 has become incredibly top-heavy.
Going into this month, the biggest ten holdings of the S&P 500 had a weighting of roughly 36%. Although it seems we were able to call the top two months ago, it is still at one of the highest levels in modern history.
JPMorgan
Even better, wealth managers also make the case that broadening will be supported by the fact that money market funds hold more than $6 trillion. This is also something I have been on top of in articles like this one.
Essentially, the idea is that a mix of a broadening AI trend, rate cuts, and a potential soft landing bode very well for stocks that have been left behind.
Our view has been that with resilient earnings and decelerating inflation, we’d see a broadening out of earnings growth, and so we’ve recommended exposure to the S&P Equal Weighted Index (SPW) and to profitable small- and mid-cap shares via the S&P Midcap 400 and S&P Small-Cap 600. Even after the recent selloff in global equities, we think it more likely that recent soft data is a seasonal slow patch and not the start of a recession.
[...] Also, earnings troughed in 2023, and we now see a path to 10 out of 11 sectors delivering earnings growth by the end of this year. - Bloomberg (emphasis added)
Although a full-blown recession will likely cause safe mega-caps to outperform, the risk/reward is more favorable for a market broadening, which is why I am staying away from the big tech stocks.
Please note that this is by no means an attempt to get people to sell their tech stocks. I am just making the case that the risk/reward has become less favorable, which is why I am increasingly focused on higher-yielding dividend stocks.
This includes midstream companies like Antero Midstream (AM), which has a 6% yield and is structured as a C-Corp. It does not issue a K-1 form, which is why I own the stock.
Antero Midstream (Article):
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I also like high-quality real estate stocks, including Realty Income (O) and VICI Properties (VICI). Both yield more than 5% and have a good long-term risk/reward.
Realty Income (Article):
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VICI Properties (Article):
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I believe these investments are fantastic in a situation where market strength broadens and money market funds start to move into high-quality dividend stocks as bond yields keep falling.
Idea 2: Infrastructure
Whenever I read about infrastructure, my heart rate increases, as I love this sector. There are so many great wide-moat investments in the infrastructure space, supported by secular growth and the fact that we all need infrastructure - regardless of the state of the economy.
Secular growth is based on a number of factors (among others):
- The modernization of U.S. infrastructure. Since 1960, the population in the United States has doubled. Most infrastructure was built shortly after.
According to the US Army Corps of Engineers and the American Society of Civil Engineers, the average life of a significant piece of infrastructure is 50 years. The average age of a US bridge is 44 years, 45 for significant pipes and 57 for dams. - NYU
- The energy transition and fast-growing technologies like artificial intelligence require better infrastructure, which puts tremendous emphasis on modernization.
Here's what Bloomberg wrote:
Look to electrical equipment products and services: transformers, switch gear components and connectors, microgrids, anything critical to developing/transmitting power more reliably or efficiently. For us, a company doesn’t have to be 100% exposed to AI — it may only be 20% of their business. We like paying a cheaper multiple for growth versus a pure play, but we have to love the other pieces of the company.
That's where Amphenol (APH) comes in. Amphenol is an industrial company that has seen an annual return of 19% over the past twenty years, fueled by aggressive M&A and exposure in fast-growing areas. The company sells supplies to a wide range of industries, including industrial, mobile devices, IT Datacom (data centers!), and aerospace.
Amphenol Corporation
Essentially, Amphenol is a "picks and shovels" play for infrastructure and related activities, which is why it is growing so fast.
On top of that, it benefits from secular growth in major areas. Defense, which accounts for 11% of its total sales, saw 14% growth in U.S. dollars. The commercial aerospace sector saw 60% growth, supported by the CIT addition and rising demand for next-gen components.
Meanwhile, the IT datacom market benefits from data center demand. According to the company, its products are key in enabling the high-speed and power interconnect needs of these systems. It saw 57% growth in this sector.
For the third quarter, the company expects sales between $3.7 billion and $3.8 billion and diluted EPS between $0.43 and $0.45. This translates to 16% to 19% sales growth and 10% to 15% EPS growth. - Article
The problem is that APH isn't cheap anymore, as it trades at a blended P/E ratio of 37.8x. The good news is that analysts expect 17% in both 2024 and 2025, potentially followed by 14% growth in 2026. This is why I have APH on my watchlist, as a great investment during market corrections. It yields 1.0% after hiking its dividend by 50% for the third quarter.
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Investors looking for higher yield may like the Brookfield Infrastructure Corporation (BIPC) or Brookfield Infrastructure Partners (BIP). The only difference is tax treatment.
This company owns and manages critical infrastructure across the globe, with 70% of its assets located in the Americas. This includes utilities (transmission and distribution assets), transportation (rail, toll roads, and diversified terminals), midstream (energy transportation and storage), and data (data transmission and data storage).
Brookfield Infrastructure Corporation/Partners
These assets have major benefits:
- 70% of its funds from operations have no volume or price exposure.
- 20% of its FFO comes from regulated exposure.
- Only 10% are market sensitive.
- 85% of its FFO is protected against inflation.
BIPC yields roughly 4%. The company aims for 5-9% annual dividend growth and a 60-70% payout ratio.
Brookfield Infrastructure Corporation/Partners
Here is my most recent article on the company: article.
On top of that, infrastructure demand makes midstream companies attractive, as the United States does not have the assets it requires to support rising natural gas production, demand, and export.
The Williams Companies (WMB) noted that demand for natural gas has grown by 43% since 2013. However, infrastructure has increased by just 25%. Storage has barely grown! That's why this midstream company with a 4% yield is aggressively investing in these assets.
The Williams Companies
I also like Kinder Morgan (KMI), which handles the pipelines supporting 40% of natural gas production in the United States.
Kinder Morgan
Kinder Morgan yields 5.4%. Both KMI and WMB are C-Corps that do not issue K-1 forms.
The Williams Companies (Article):
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Kinder Morgan (Article):
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I also like LandBridge (LB). Although this stock has not declared a dividend (it went public in June), it is focused on bringing data centers to the Permian Basin, where energy is cheap, and it owns more than 220 thousand acres. It benefits from surface income, water assets, and oil and gas royalty income. I covered it in this article. LB is my third-largest investment.
This brings me to idea 3.
Idea 3: Buying Underperformers
This idea is very similar to the first idea (market broadening). However, experts named very specific ideas, especially in the healthcare sector.
Health care is a hard-hit area, and there are names in the sector like Cigna with strong balance sheets. When you think about regulation, financials and health care come up. If we have an administration with less regulation, then health care should benefit. You also have the benefit of the big weight-loss drugs and all of the innovation around making oral pills instead of injections — you could have more of a secular theme around that. - Bloomberg
When it comes to buying beaten-down stocks, I LOVE the oil and gas sector. In fact, I recently wrote an article titled "Collapsing Oil Prices? Here Are My 3 Favorite High-Yield Oil Stocks To Buy."
My favorite is Canadian Natural Resources (CNQ), Canada's largest oil and gas company. It distributes 100% of its free cash flow to shareholders, has a base yield of almost 5%, has the longest reserve life among its peers, and has favorable decline rates in Canada's oil sand operations.
Canadian Natural Resources (Article):
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On the American side of the border, I like Diamondback Energy (FANG), one of the most profitable onshore producers. After announcing its plans to merge with Endeavor, it distributed 50% of its free cash flow to shareholders. I expect that number to rise to 75% in the first half of 2025. FANG also uses special dividends, which is something I like.
At $90 WTI, it has an implied free cash flow yield of more than 12%.
Diamondback Energy
Another recovery play I like is Johnson & Johnson (JNJ), a company increasingly focusing on the fast-growing MedTech and Innovative Medicine markets.
This AAA-rated Dividend King has hiked its dividend for more than 60 consecutive years. It yields 3% and is expected to see high-single-digit annual EPS growth in the years ahead.
Johnson & Johnson (Article):
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Although there are many ways to deploy cash, I believe the picks in this article bring something special to the table. Supported by secular growth, I expect these stocks to beat the market in the years ahead, supported by either elevated yields or dividend growth.
Takeaway
When looking at where the wealthiest individuals invest their capital, it's clear that their strategies can offer valuable lessons for us.
Even if we're not deploying millions, understanding these trends helps inform my long-term approach.
By observing "smart money" moves, we can refine our dividend-growth strategy, by focusing on quality investments like midstream, real estate, and infrastructure stocks.
These sectors offer strong fundamentals, reliable yield, and a potential hedge in uncertain times.
While big tech stocks may dominate headlines, I'm leaning towards sectors with better risk/reward profiles for consistent wealth-building opportunities.
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