As I’ve mentioned before, there exists a wide gamut of wonderful dividend-paying companies out there which I would love to have a stake in someday. One of the biggest thrills of dividend investing lies in the search for the next fantastic company you will deploy your hard-earned cash in; the search for that hidden gem, that diamond in the rough. Sometimes you can get so consumed by your pursuit that it becomes like an intoxicating addiction (though you could do much worse in the addiction department, mind you). This is especially true for individuals who have a tendency for perfectionism and who perhaps even possess somewhat OCD personality traits. And guess who is such an individual?
If you guessed Santa, well…you guessed wrong. Why the **** would you guess Santa anyway? On the other hand, if you guessed yours truly, then congratulations, you guessed right! Give yourself a pat on the back, you incredibly smart and sexy thing, you. Indeed, I’m the kind of individual who, once he develops an interest in an endeavor, especially of an analytic nature, becomes determined, almost obsessively so, to see it to completion in as elegant and perfect a way as possible. I would wager that this is the reason I have such a strong penchant for numbers, mathematics, and computer science; because these are fields that lend themselves especially well to meticulousness and punctiliousness. And similarly, so does dividend investing.
I spend a lot of time every day thinking about my portfolio, my equities, my capital, my savings, which stocks I want to invest in next, white fluffy bunnies, etc. And since I’m always thinking about these things, I thought it would be fun to spend some time outlining what my “ideal portfolio” would look like. Doing so will not only make for some (hopefully) interesting discussion with you, my wonderful fellow dividend investors, but it will also act as a brain dump of sorts for me, thus allowing me to better visualize what my ultimate end-goal with dividend investing would potentially look like.
Now, before I share with you what my ideal portfolio looks like, I would like to emphasize that there is of course no universal “perfect” or “ideal” portfolio. My ideal portfolio won’t be the same as your ideal portfolio. They might look similar, or they might look very different. But thankfully, therein lies the beauty and fun of investing! There is no “correct” or “optimal” way of building wealth. Different portfolios, and even totally different investing strategies like day trading, technical analysis, or yolo trading could all lead to great success (just kidding about yolo trading, that sounds like a terrible idea). Variety is the spice of life after all! As long as you stick to sound investment strategies and principles, it doesn’t matter if your list of ideal stocks doesn’t match someone else’s. Don’t like stock A for personal ethical reasons? Ditch it. Don’t like stock B because you don’t feel too comfortable with the sector it belongs to? Ditch it. There are more than enough options to satisfy everyone. Investing is a life-long journey, and as such it should be fun and enjoyable. Otherwise, what’s the point?
One last thing. Please keep in mind that in showing you my ideal portfolio, I am not making any recommendations to buy any securities, nor am I making any assurances regarding the future performance of any of these stocks. It is each individual’s responsibility to only invest after conducting their own research.
Ok, enough with all the rambling. Without further ado, I present to you the ZtZ ideal dividend portfolio:
|Basic Materials||BHP Billiton||BBL|
|Dr Pepper Snapple Group||DPS|
|Procter & Gamble||PG|
|National Oilwell Varco||NOV|
|Royal Dutch Shell||RDS-B|
|Johnson & Johnson||JNJ|
|Deere & Company||DE|
|Textainer Group Holdings||TGH|
|Omega Healthcare Investors||OHI|
|Realty Income Corporation||O|
|Starwood Property Trust||STWD|
|Automatic Data Processing||ADP|
|International Business Machines Corporation||IBM|
|Utilities||American Water Works Company||AWK|
|Piedmont Natural Gas||PNY|
As you can see, my ideal portfolio would be quite large; the tally comes out to 60 companies. For some investors, that would be way too much, while for others, it might be just right. The minimum number of stocks I’d personally want to hold would probably be around the low/mid 30s, while 60 would be nearing the upper limit of the number of securities I’d want to manage.
Now that I’ve outlined what the portfolio would look like, I’ll give you a quick overview, by sector, of my reasoning for my choices. Let’s dive in.
The basic materials sector isn’t one that I’m particularly interested in, nor that I’m very knowledgeable about. With that said, BHP Billiton is the world’s largest publicly traded mining conglomerate, one of the world’s biggest producer of copper, manganese, and iron ore, and an overall fantastic company with a strong track-record. Honestly, this company alone could give me all the exposure I’d need and want to the basic materials sector.
I also chose Nucor to get some exposure to the steel industry. Nucor is the second largest steel producer in the U.S., has good management, and boasts a strong yield. Plus its name sounds cool. Just a solid company overall.
The last pick here is Praxair, a company which I hadn’t heard of until recently when Jason from Dividend Mantra brought it to my attention in one of his posts. Praxair is one of the largest industrial gases company in the world, producing and selling a variety of gases such as hydrogen, oxygen, and nitrogen. It also provides surface coatings that can reduce the effects of corrosion and oxidation. The specialty chemicals industry is one that I really don’t know anything about, but the company has strong fundamentals and I like the idea of rounding out my position in the basic materials sector with a company that deals with commodities that are different from the ones that usually come to mind like metals and oils.
The consumer discretionary sector consists of businesses that sell nonessential goods and services (e.g. media companies, retailers, automobile manufacturers, etc.). As such, I’d rather not have too much exposure to this sector because its performance is highly dependent on the state of the economy. When the economy is doing well, people have more disposable income, and can thus afford to buy more “luxuries”, but when the economy is in the pooper, these are the companies whose products are the first to be cut from people’s budgets.
There are really only 3 dividend stocks in this category that I feel are necessary. McDonald’s doesn’t need much of an introduction. It’s been successfully selling hamburgers for the past 50 years and will most likely continue to do so for the next 50 years. Its business model is stupidly easy to understand, and it works. Greasy food is delicious and people will continue to crave it as long as it exists.
Walt Disney is a mass media monster, and its film studio is perhaps the most well-known in the world. The company inexorably pumps out blockbuster hits one after another, it’s ridiculous. Franchises like The Lion King, Toy Story, Monsters Inc, and Frozen have collectively generated more than certain countries’ GDPs, and with Disney’s recent acquisitions of Marvel and Lucasfilm, the company might as well start printing money at this point.
Hasbro synergizes very well with Disney since it has obtained exclusive rights to the Marvel and Star Wars franchises, which will undoubtedly bring in massive amounts of revenue in the coming years as every young boy/30-year-old virgin geek in the country will be eager to get their hands on the latest Hulk and Darth Vader action figures. Furthermore, Hasbro owns a wide array of massively popular franchises such as G.I. Joe, Transformers, Scrabble, Monopoly, Nerf, and best of all of course, My Little Pony.
When it comes to safe and dependable stocks, you really can’t go wrong with the consumer staples sector. The companies that fall under this category are the manufacturers of common household consumer goods and foods that you purchase on a weekly basis when you go grocery shopping. These companies make for very defensive investments since they sell products that people will still need to buy even in times of economic hardship and recession. As a dividend investor, I expect a significant portion of my portfolio to be composed from this sector, as these stocks will provide an incredibly reliable and persistent source of passive income pretty much until the day I draw my last breath.
I won’t go into the details of all the holdings here, as you are undoubtedly familiar with all of them. Coca-Cola is perhaps the most recognizable brand in the entire world, and companies like PepsiCo, General Mills, Kellogg’s, Kraft, Hershey, Clorox, Colgate-Palmolive, Unilever and Procter & Gamble collectively own hundreds and hundreds of brands that probably make up 90% of all the products you find in any local supermarket. And of course you have Wal-Mart, the infamous superstore chain where you will undoubtedly find all the products from these companies.
The consumer staples sector is about as boring as it gets, but for a dividend investor, it provides some of the safest and most reliable dividends you’ll find anywhere.
The energy sector is synonymous with oil. Renewable energy companies obviously exist too, but the sector is largely dominated by the oil industry, and rightfully so: the world currently runs on oil, and we are still decades away from feasibly replacing fossil fuels with clean sources of energy like wind and solar on a global scale.
Consequently, the majority of my holdings here simply consists of all the big oil names: Chevron, Exxon Mobil, Royal Dutch Shell, Total, and ConocoPhillips. These companies are cash cows that will continue to make profits so long as there is still oil to be drilled from the Earth. They all boast very fat yields and provide a steady, dependable source of passive income for dividend investors.
Kinder Morgan and Spectra Energy are midstream companies that focus on energy infrastructure and transport. They own thousands of miles of pipelines and hundreds of storage terminals, and oversee the transportation of a variety of fossil fuels like petroleum, crude oil, and natural gas.
Lastly, National Oilwell Varco is a leading worldwide provider of oil and gas drilling equipment that has been around since the mid-19th century. It is a well-respected company led by a strong and experienced management team focused on providing shareholder value.
Together, these company work synergistically to create what I consider to be a very robust and stable core of energy companies for my portfolio.
To me, the financials sector can be divided into two parts: banks, and credit cards. Banks have a reputation for being risky and volatile, and, in the aftermath of the Great Recession, investors have become especially weary of them. As a dividend investor who looks for stable companies with reliable dividends, I’m definitely not looking to get much exposure to the banking industry. There are only two banks that I’ve included in my ideal portfolio: Wells Fargo and Bank of Nova Scotia.
Wells Fargo is one of the biggest banks in the United-States and boasts what is arguably the most valuable and respected bank brand in the world. The company has been around since 1852, sports a solid yield of 2.6%, and has a very low payout ratio of 33%, which gives it ample room to grow its dividend over the years to come. It’s also the largest holding held by Berkshire Hathaway, making up over 23% of its portfolio. If the Oracle of Omaha loves Wells Fargo so much, I definitely feel comfortable loving it too 😉
Bank of Nova Scotia is included to give me some Canadian exposure and because it too is a solid company. It is one of the largest banks in Canada, offers a very fat yield of 4.2%, and also sports a modest payout ratio at 48%. Oh, and it’s also been paying uninterrupted dividends since 1833. That’s right, 1833. To put things in perspective, Canada didn’t even exist until 1867, so…yeah.
Beyond these two banks, the other companies here are the 3 big credit card companies: American Express, MasterCard, and Visa. I’m a firm believer in credit cards, as the world is increasingly moving toward plastic transactions. The majority of global payment transactions are still done in cash though, which means that there is still huge growth potential for credit card companies. American Express, MasterCard, and Visa are all extremely well-established and together pretty much hold a monopoly over the credit card industry. These are stocks I definitely want in my portfolio.
When someone mentions the healthcare sector, there is one name that always immediately comes to mind…Johnson & Johnson. Perhaps one of the most popular stocks ever, this classic Dividend Aristocrat started paying dividends in 1963 and has unfailingly been increasing them every year since. Everyone and their mother owns shares of JNJ, and with such a dedicated dividend track record, it’s easy to see why. Johnson & Johnson will most definitely continue to have a place in my portfolio over the coming decades.
Beyond JNJ, you’ll probably recognize two other big names from the pharmaceuticals industry in Abbott Laboratories and Baxter International, with the former being known for developing the first HIV blood-screening test in the mid 1980s. Combined, these 3 companies boast a massive portfolio of drugs that treat a large range of diseases and other immune disorders, thus giving me an incredible amount of exposure to the healthcare/pharmaceuticals industry.
The other two stocks you’ll find in this sector are Amgen and Gilead, both of which are pure biotech companies. The biotech industry is definitely not the place to go looking for dividend-paying stocks, and is usually best left alone if your strategy lies in dividend investing. With that being said, as someone who personally really likes the biotech industry, I still think there is some merit in including a few of these companies in a dividend portfolio, and to treat them more as dividend/growth hybrids rather than standard dividend stocks. Amgen has a robust pipeline of drugs that should do well for its earnings throughout the next half-decade, and with a yield of 2% and a low payout ratio of 36%, the company still has plenty of room to grow its dividend into the future.
Gilead only just recently announced it would start paying a dividend, so I can’t speak much to it yet. It is a company that I like though, and its two flagship Hepatitis C drugs, Sovaldi and Harvoni, have done wonders for the company’s earnings over the last few years. All in all, I strongly believe that Gilead Sciences still has many a bright day ahead and that holding a small position in its stock will prove to be a good investment over the long run.
I really like the industrials for their relative stability and reliable dividends, and as such I expect a substantial portion of my ideal portfolio to come from this sector. Companies in this category are involved in the production of goods used in construction and manufacturing spanning a wide range of industries.
Most of my holdings here are big names that have extensive and proven track records in their respective fields, and quite a few of them are actually currently on my watchlist for 2015.
Lockheed Martin is the grand-daddy of aerospace and defense, and a company that I am personally very fond of and eager to initiate a position in sooner than later. Caterpillar is the undisputed king of construction and mining equipment in the entire world, and Deere & Company is a leading global provider of agricultural and farming equipment. Both are great companies run by great management, and make a wonderful addition to any dividend portfolio.
General Electric and Emerson Electric offer an extensive gamut of engineering services across a variety of different segments like aviation, transportation, power, and energy management. These are classic companies that you buy and hold pretty much forever. Textainer Group Holdings is a holding company involved in the selling and leasing of marine cargo containers. This is definitely a cyclical stock (as are most industrial stocks, honestly), but it sports a very fat yield just north of 6% and a reasonable payout ratio of 57%. I like it because it gives me some exposure to the marine services industry, which my portfolio is otherwise lacking in even with all the other big industrials I have here.
Lastly we have Waste Management, which is, unsurprisingly, a waste management company. I view this as one of the most defensive stocks you could invest in, as waste collection will always be a necessity short of a massive global apocalypse, in which case I would have bigger issues to worry about than the state of my portfolio.
Like I said, I expect the industrials sector to eventually make up a large portion of my portfolio, much like I expect the consumer staples sector to do as well.
Real Estate (REITs)
I don’t plan on directly investing in real estate any time soon, but I would definitely like a bit of exposure to the real estate market, which is where REITs come in. REITs tend to have big, meaty yields since they are pass-through entities that don’t have to pay corporate federal and state income taxes. The downside is that those dividends usually don’t count as “qualified dividends”, and as such are taxed as ordinary income rather than at the long-term capital gains level.
Starwood Property Trust and Realty Income Corporation invest primarily in commercial real estate. Realty Income in particular is a long-time dividend-investor favorite since it pays out a monthly dividend, thus providing a steady source of passive income year-round.
One of the risks with REITs of course is that they are sensitive to rising interest rates, but one of the nice things about Starwood Property Trust is that it also has a strong lending segment, which means that, as a lender, rising interest rates actually benefit this part of its business model, thus balancing out the negative impact.
Omega Healthcare Investors is really interesting because it invests in healthcare real estate such as skilled nursing homes, assisted living facilities, clinics, and hospitals. It has been one of the best-performing REITs over the past decade and is currently on the cusp of closing a merger deal with fellow healthcare REIT Aviv, which will result in a combined portfolio of nearly 800 properties across 40+ states. This puts Omega Healthcare Investors in an ideal position to profit from the aging baby boom population, which makes up nearly one-third of the entire U.S. population. Sorry mom and dad, but I unashamedly plan on profiting from your gradual but inevitable transformation into decrepit gremlins.
Pls don’t hate me.
Dividend investors tend to stay away from the tech sector due to its low dividends, high volatility, and considerable risk. With that being said, I do think that there are a few tech stocks that are worth investing in; plus, I personally feel pretty comfortable with this sector since I have a strong tech background, and thus perhaps a better understanding of what some of these companies do and what their future potential looks like.
The quintessential tech stock that comes to mind is of course IBM. Big Blue has been around for more than four times the number of years I’ve spent on this Earth so far, and it’s faced a laundry list of obstacles and headwinds over the last century, only to emerge every time and live to tell the tale. The dividend stalwart boasts a mighty yield and a solid track-record of dividend increases, and even though there are currently some uncertainties regarding its future which I have already succinctly addressed here, I feel it is a classic stock that belongs in any dividend investor’s portfolio.
Microsoft is pretty much ubiquitous with personal computers, and I like the direction CEO Satya Nadella is taking the company in with his ‘mobile-first, cloud-first’ initiative. The stock also currently sports a fat yield of 3%, which is really attractive.
Intel is the undisputed king of microprocessors (lol AMD), and its technology can be found inside pretty much any computer. Yes, I am aware that, much like with IBM (and even Microsoft to be honest), there is currently a lot of debate going on regarding the company’s future, but without going into details here, I personally find the idea of a technological future without Intel in the picture to be pretty laughable.
ADP is by far the leading payroll processing software developer in the U.S., and it is so deeply rooted in so many businesses that I don’t predict any issues for this company in the foreseeable future. Businesses are still going to need payroll, tax, government compliance, and HR solutions 20 years from now, so yeah. Furthermore, ADP is a Dividend Aristocrat, which gives me confidence in its management.
Lastly, we have Apple. Unless you’ve been living under a rock for the past 15 years, I’m sure the company doesn’t need any introduction. Apple is a pioneer and leading innovator without peer in the consumer electronics department, and it is also one of the wealthiest companies in the world. The amount of free cash flow Apple sits on is downright obscene. The company comes with a paltry yield of 1.5%, but that has more to do with Apple’s dividend simply not being able to keep up with its insane share-price appreciation than with it not having the means to pay out more. To me, Apple is more of a power-play stock than a dividend stock, but one that I am willing to make an exception for and include in my portfolio. With over $50 billion at its disposal, an incredible amount of brand power that would surpass 9000 on Vegeta’s scouter, and a breed of brand loyalty approaching fanatical levels, Apple might as well start its own country at this point. Seriously.
The telecom sector is fairly straightforward. This is where you’ll find companies that provide communication services via fixed-line, cellular, wireless, and fiber optic technology. The two largest providers in the U.S. are Verizon and AT&T, by far, and really they are the only ones that I am interested in. The two are neck and neck, with Verizon narrowly beating AT&T by a few million subscribers; however, third-place contestant Sprint doesn’t even come close to these two, with less than half the total subscribers that they have.
This sector is known for its slower growth, stability, and high yields. AT&T and Verizon both pay hefty dividends, and both have excellent track-records of consistently increasing their payouts year after year. AT&T is particularly popular among income investors as it is part of the elite Dividend Aristocrats group, having increased its dividend for more than 30 consecutive years to date.
I could of course look into foreign telecoms too, but honestly, by investing in both AT&T and Verizon, I feel as though I get all the telecom exposure that I could need and want.
Like the telecoms, the utilities sector is another area of the economy known for its stability, modest growth, and high yields. Companies that provide electricity, gas, and water all fall under this category.
My holdings here give me a large amount of exposure to all the parts of the sector. Duke Energy and Southern Company are two of the largest electric utility companies in the U.S. and together serve an enormous portion of the central and eastern regions of the country, while Con Edison provides both electricity and gas to the greater New York metropolitan area.
Aqua America, American Water Works, and York Water are water utility companies that collectively serve over 45 U.S. states as well as parts of Canada. Water companies are about as recession-proof as you can get, since water is essential to life and we can’t live without it.
Piedmont Natural Gas, a natural gas distributor serving over a million customers across the south-eastern United-States, rounds off the portfolio by giving me some exposure to the natural gas industry.
Whew, this was a long post. If you’ve made it this far, thank you! I appreciate your taking the time to indulge in my rant 😉
So that was my ideal dividend stock portfolio. Obviously, it isn’t set in stone, and it is highly likely that, by the time I get to a point where I’ll have enough capital to be invested across so many different equities, I will have discovered some other companies that I prefer and some of my current choices will no longer be worthwhile. After all, the only true constant in the world is change, and especially so when it comes to the economy and the stock market.
The point of this post wasn’t to be absolute or dogmatic in what I will invest in the future, but rather to give you a general overview of what my thoughts and ideas regarding the world of dividend investing look like at this point in time. It will be interesting to look back regularly on this post in the future to see how my opinions and choices evolve over time both as the world changes and as I become a smarter, more experienced investor.
What about you, what does your ideal portfolio look like? Do you agree with some of my choices? I’d love to hear your thoughts in the comments!