Thursday, January 29, 2015

Themes For My Portfolio For 2015 And Beyond

I’m currently invested in 51 different companies across every single economic sector. You’d think I’d just call it a day right there and continue to allocate fresh capital and reinvest dividends back into those same companies. And that probably wouldn’t be a bad idea.
Yet, I also see a number of high-quality companies obviously missing from the Freedom Fund.
There are a number of investors out there that like to maintain rather concentrated portfolios. Nothing wrong with that, but I do think there are a lot more than 20 or 30 really high-quality companies that one can invest in. Thus, I see no reason to limit myself.
I’ve often heard the old line about how one’s first or even twentieth idea is going to be better than their fortieth. I’m not so sure about that. For instance, I just very recently initiated a position in Walt Disney Co. (DIS), which became my 52nd idea. Is that a worse idea than Johnson & Johnson (JNJ) – one of my very first investments? I don’t believe that to be the case. I think they’re both excellent companies in totally different industries, offering a very different mix of yield and total return potential. But different doesn’t necessarily make one better than the other, nor does it make Disney a bad investment just because it came later than Johnson & Johnson. Just my opinion on it.
On that note, I feel there are some shortcomings in the portfolio. Some ideas that I still have in my mind, yet have lacked the capital or opportunity to realize. What you’ll see below are a few ideas that I still have that I hope to capitalize on at some point. These will be broader themes across the portfolio with specific stocks I have in mind to fulfill those themes.

Shipping/Transportation

I believe wholeheartedly that the world of 10 years from now will be moving more goods than the one of today. There will almost surely be more people alive, and people tend to buy stuff. Be it food or personal goods, or even energy to power their homes, transportation will increasingly be needed. I’m currently invested in Norfolk Southern Corp. (NSC), which has been a fantastic stock for me. However, I see the need to increase my exposure in this area.
Some stocks on my watch list here include:
Union Pacific Corporation (UNP) – This stock would increase and round out my investment in rail, giving me exposure to the west. UNP operates the largest network in the US. Though the stock is rarely cheap and the yield isn’t particularly high, rail offers huge competitive advantages in the form of barriers to entry. The company currently sports eight consecutive years of dividend increases.
United Parcel Service, Inc. (UPS) – An investment in UPS would offer one even greater exposure to the increasing movement of goods across the world, and in a manner different from rail. Consumers continue to shop online more and more, and these goods have to be shipped from the retailer to the consumer. UPS is one of the key players in this arena. Another stock that’s not particularly cheap, but one I’d love to get my hands on. UPS has increased its dividend for five consecutive years.
C.H. Robinson Worldwide, Inc. (CHRW) – This is a global third-party logistics company. Goods move in a number of ways, but all of that movement needs to be properly executed and tracked. That’s where CHRW comes in. Another high-quality company that I’d love to invest in. CHRW has managed to raise its dividend for the past 16 consecutive years.

Investment Management

This is another area that I’m missing any exposure to. While it’s never been a particular priority for me, I see a number of companies that manage assets that operate at extremely high levels. Though some can be a bit cyclical due to the fact that people tend to pull assets when the economy is tanking, these companies do well over long periods of time.
These are just a few companies on my watch list here:
T. Rowe Price Group Inc. (TROW) – A household name in this sector, they provide global asset management solutions. Though I’m obviously a do-it-yourself investor, many others lack the time, interest, or inclination to follow suit. Thus, they generally allow professionals to manage their investments. This is sometimes required through employer-sponsored 401(k) plans, as those generally don’t allow one to invest in individual stocks. TROW has an excellent dividend growth record, with 27 consecutive years of dividend increases.
Franklin Resources, Inc. (BEN) – They run the venerable Franklin Templeton Investments firm, which is another household name. The yield isn’t quite where I’d like it to be, but this is another company that does really well over lengthy periods of time. More people means more assets to manage, and there continues to be a groundswell of education that points to the fact that people need to invest more. There’s a ton of untapped potential here for BEN and other companies like it. Another great dividend growth stock, with 34 consecutive years of dividend increases.
Eaton Vance Corp (EV) – This stock flies under the radar, but the fundamentals appear to be excellent. Though it’s smaller than the other companies I’m watching in this sector, they’ve done incredibly well as a company for a long period of time. I wouldn’t mind at all being a shareholder in this company at the right price. They’ve increased their dividend for the past 34 consecutive years, which runs right through the financial crisis. Good stuff.

Insurance

Another huge hole in my portfolio. I’m currently invested in just one insurance company: Aflac Incorporated (AFL). Great company and great stock, but I’d love to broaden my exposure here. I lack any investments in property & casualty insurers, which can be lucrative investments. Insurance companies have access to huge amounts of capital via their floats, which can supercharge their returns.
The three insurance companies I’m most excited about include:
Travelers Companies (TRV) – I wrote about this stock not too long ago, and totally missed out by not investing right away. My capital is limited, but I still regret not pulling the trigger. Excellent fundamentals here and one of the larger insurers around, which I like. I tend to shy away from real small insurance companies due to the risks of catastrophic losses. TRV has increased its dividend for the past 10 consecutive years.
Chubb Corp. (CB) – Another high-quality insurance firm. Revenue hasn’t grown in some time now, but the company just continues to increase profit and dividends anyway. I regret not buying this stock earlier in the year when it could have been had for much cheaper, but the same could be said for a number of stocks. At any rate, I do hope to purchase shares at some point in the near future. With 32 consecutive years of dividend increases, I think this stock deserves a place in the portfolio.
HCC Insurance Holdings, Inc. (HCC) – This insurer operates a bit differently than the other two on the list here. In addition, it’s a much smaller company. Nonetheless, it sports excellent fundamentals across the board. The stock has been on a tear this year, much to my chagrin. But I still think there’s an opportunity here for the long-term investor. HCC has increased its dividend for the last 18 consecutive years.

Industrials

I already have some exposure to some great industrials. However, there are still a number of great companies that produce great products that I’m not invested in yet. This isn’t a particular priority for me, but if an opportunity with the right stock comes my way, I won’t hesitate to pull the trigger. This is just another play on a growing economy. A number of industrial firms produce the products that allow a number of other industries to work properly. I love investing in companies that fly way under the radar, yet produce products that are ubiquitous. Big and small products alike – from jet engines to adhesives – remain in demand every single day. It should also be noted that some of the lengthiest dividend growth streaks around lie in the industrial sector.
This list isn’t comprehensive, but does include:
3M Co. (MMM) – A fantastic company. What can really be said that hasn’t already? This is a great example of what I was discussing earlier. I missed out on MMM. I just plain made a mistake not investing in the company earlier. Does that make it somehow a worse investment than one of my earlier purchases, like, say, PepsiCo, Inc. (PEP)? I don’t think so. Both have done well. Just vastly different companies. 3M has been on a tear lately, both in regards to its stock price and its dividend increases. It remains on my radar. 3M has increased its dividend for the past 56 consecutive years, which puts it in rare company.
United Technologies Corporation (UTX) – This is a unique firm that’s heavily diversified. They produce products like jet engines, helicopters, elevators, and air conditioning systems. And they’ve done well with this unique mix. This is another high-quality firm that I’d love to invest in at some point. 21 consecutive years of dividend increases speaks for itself.
Praxair, Inc. (PX) – This would allow me another investment in the industrial gasses area, which I’m currently exposed to through my investment in Air Products & Chemicals, Inc. (APD). I love the industrial gasses companies due to the fact that they basically operate an oligopoly where their clients have to lock up long-term contracts. PX has increased its dividend for the past 21 consecutive years.

Consumer Products

This is currently where my heaviest investment lie. But that’s for good reason. No matter what’s going on with the economy, people are still going to brush their teeth, buy their food and beverages, and take showers. Thus, companies that produce these products make for great long-term investments. Furthermore, their volatility is somewhat low, which balances out some of the more cyclical stocks. However, where I already have a lot of exposure here, there are still a few great companies out there that I’d love to own a piece of.
These are just three select companies I’m interested in here:
Nestlé SA (NSRGY) – The largest food company in the world. How am I not invested yet? Another good example of the possibility of one’s 60th idea being just as good as their first. The problems with NSRGY are that it pays an annual dividend and also has a foreign dividend withholding tax by the Swiss government. This is nitpicking, however, when you consider the quality of the company and its brands. Another glaring hole in my portfolio. NSRGY has increased its dividend for the past 14 consecutive years.
Church & Dwight Co. Inc. (CHD) – An absolute monster in cleaning products, with brands ranging from Arm & Hammer to Kaboom to OxiClean. Great fundamentals, though it’s another stock that seems perennially expensive with a low yield. I’m waiting for the right opportunity, but I expect that this stock will be in the portfolio at some point or another. CHD has increased its dividend for the past 18 consecutive years.
Colgate-Palmolive Company (CL) – This stock haunts me to this day. I regret not buying it years ago, and only didn’t do so because, like today, it was expensive. The stock currently sports a P/E ratio north of 30. I don’t care what anyone says, but I just refuse to go that high. Maybe I’m making the same mistake over and over again, but I’d rather miss out on an opportunity than risk loss of capital. If/when this stock comes back to earth, I’ll be one of the first in line aiming to buy shares. Colgate has one of the longest dividend growth records around, at 51 consecutive years and counting.

Retailers

Retailing isn’t my favorite area to invest in. Typically, it’s just a brutal industry. You have low margins and customers aren’t usually loyal to one particular retailer. If a consumer can get the same product cheaper down the road, then that’s where they’re going to go. However, I think there are a few standouts that offer potential. I’m already invested in Wal-Mart Stores, Inc. (WMT) due to their low-cost advantages and Target Corporation (TGT) for their niche products. But there are some other retailers on my watch list that have done particularly well over the last decade and will likely continue to do well for the foreseeable future.
With that said, three retailers in particular remain on my radar:
Costco Wholesale Corporation (COST) – A warehouse juggernaut, this company has grown faster than I thought they would. They now sport revenue well north of $100 billion, after more than doubling revenue over the last decade (from an already large base). I don’t shop here, but my fiance does. She loves it. From what I can tell, they have a stickier customer base than your usual retail center due to their membership structure. The stock is way too expensive for me here, but I’d be interested in initiating a position at a much more attractive valuation. Costco has increased its dividend for the past 11 consecutive years.
TJX Companies Inc. (TJX) – TJX, via its stores, offers a niche experience through what can only be described as a “treasure hunting experience”. TJX operates the Marshalls, T.J. Maxx, and HomeGoods stores in the US, as well as some stores in Canada and Europe. I love their growth and the fact that their margins are higher than a typical retailer. Their unique off-price apparel and other goods is difficult to replicate in another setting.  TJX has a great dividend growth record, with 18 consecutive years of dividend raises under its belt.
Ross Stores, Inc. (ROST) – Another off-price retailer, Ross has grown like gangbusters over the last decade. Revenue is up more than twofold and earnings per share has grown almost sevenfold. Like TJX, the stock isn’t cheap right now. However, if the valuation happens to come around right at the same time I have some spare capital, I wouldn’t mind at all being a shareholder in ROST. I regret not investing at the beginning of my journey, as the stock is up some 339% over the last five years. So many stocks, so little capital. ROST has a similar dividend growth record to TJX – 20 consecutive years and counting.

Other Opportunities

There are a few other sectors that I’m also interested in increasing my exposure to. I think that I’m currently underexposed to healthcare, and one company that I’d love to invest in is Becton, Dickinson and Co. (BDX). Just another stock I missed out on, as I looked at it when it was trading in the $70s. It’s had an incredible run this year, but would love to pick up shares if it drops a bit from here.
I also need to increase my exposure to REITs after selling out of American Realty Capital Properties Inc. (ARCP). I’m aiming for somewhere around 7% of the portfolio to be allocated to REITs over the long haul, but I’d be willing to move that up to 10% since I don’t own any physical real estate. I’m currently interested in adding to the REITs I’m already invested in, depending on capital and valuation. In addition, W.P. Carey Inc. (WPC) will likely fill ARCP’s now-vacant spot at some point here. WPC is currently at the top of my watch list as far as REITs I don’t yet own. I also think there are some solid REITs in the healthcare space (which could kill two birds with one stone), such as HCP, Inc. (HCP) and Ventas, Inc. (VTR).
It appears to me that some of the best values remain in the energy sector, but my allocation to energy is above 15% right now. That’s considerably above where I’d like to be over the long haul, so I remain cautious and choosy about picking opportunities in this sector. I’d like to perhaps average down on Exxon Mobil Corporation (XOM) at some point, as well as National Oilwell Varco, Inc. (NOV).

Conclusion

So that includes some of the stocks currently on my watch list that I’m not yet invested in. While some may argue my portfolio is too large already, I don’t believe that to be the case. Managing a large portfolioisn’t time consuming or cumbersome, and yet there are still quite a few great companies that I’m not yet exposed to. I see no reason to put an artificial ceiling on myself.
Obviously, I hope to invest in some of these companies over the course of many years, as this is way too big of a list to think about in short-term measures. But I wanted to share this list so as to provide some readers out there some value and ideas for their own portfolios, as well as to keep myself on task here as far as my own capital allocation.
Full Disclosure: Long DIS, JNJ, NSC, AFL, PEP, APD, WMT, TGT, XOM, and NOV.
What do you think? Any of these stocks also on your watch list? What are you interested in buying? Any general themes for your portfolio for 2015 and beyond? 
Thanks for reading.

This article was written by Dividend Mantra. If you enjoyed this article, please subscribe to my feed [RSS]

1 comment:

  1. Great quality stock watchlist. 3M, UPS, Costco are on my list. I am just waiting until they get a temporary fluctuation. Good hunting!

    ReplyDelete

Recent Posts From DIV-Net Members