Sunday, April 20

Week 146 - Spring 2014 Master List

Situation: You’d like to have a list of solid stocks to consult for your “personal” retirement plan. That’s the investment plan you're keeping outside of your “workplace” plan. We think you should focus on dividend-paying stocks issued by companies with a long history of increasing their dividend annually. Why? Because the rate those dividends increase at will exceed the rate of inflation (see Column H in the Table). That means the “personal” part of your retirement income will mainly consist of quarterly dividend checks that arrive in the mail, which differs from the “workplace” part of your income because it doesn’t get eaten up by inflation. 

Mission: Come up with a list of stocks that are safe multi-decade investments.

Execution: We’ll start with the list of 54 companies in our “universe” (see Week 122). That list initially held 51 companies but we’ve found 3 more. There are 3 criteria that stocks must meet to be included in the list: 1) be a Dividend Achiever (see with 10 or more consecutive years of dividend increases; 2) be cited in the Barron’s 500 List for outstanding growth in cash-flow based return on invested capital over the past 3 yrs and growth in revenues over the past year; 3) have an S&P credit rating of “A-” or better (see Standard and Poors).

We’ve improved on that list by removing companies that aren’t Dividend Aristocrats (see, i.e., those with 25 or more years of dividend increases, and companies that don’t perform as well as Warren Buffett’s newly-released savings plan for retail investors (see line 45 in the Table): "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers." What’s that? He writes a letter each year to investors in Berkshire Hathaway as though it were a letter to "non-financially literate" friends who have Berkshire Hathaway stock in their “trusts.” In this year’s letter (part of which is quoted above), he advises readers to simply invest in two of the Vanguard mutual funds, allocating 90% to the Vanguard 500 Index Fund (VFINX in the Tableand 10% to a short-intermediate term bond index fund. (We use IEF in the  Table because he subsequently indicated that the bond fund should exclusively invest in US Treasury issues). He also likes Berkshire Hathaway stock (BRK-A in the Table) but that doesn’t pay dividends, meaning that you’d have to periodically sell some shares to help meet your retirement expenses. 

We have 28 companies left (see Table). Fourteen are in “defensive” industries (utilities, telecommunications, consumer staples, and healthcare); we call those “Lifeboat Stocks” because they don’t sink in bad weather. Five are in the two highest risk industries (Energy and Materials), and the remaining 9 are in “growth” industries (finance, information technology, consumer discretionary, and industrial products). As always, red highlights denote metrics that underperform our favorite benchmark, the Vanguard Balanced Index fund (VBINX), which is essentially a well-hedged (40% bonds) S&P 500 Index fund. Like Warren Buffett, we think you can dispense with investment advisors and simply pick from Vanguard’s index funds. We differ in thinking you should be 40% invested in a general bond index rather than 10% invested in a short-term bond index. But there’s a very high likelihood you’ll make more money in the long run by taking his advice over ours. If, however, you start your retirement during a recession you might find that the 10% you’ve invested in a short-intermediate term bond index (IEF) doesn’t last very long, and you might have to sell some of your stock index fund (VFINX) at a loss to get by.

Bottom Line: Which of the 28 companies should you pick for your personal retirement plan? Well, 3 are what we call “hedge stocks” (see Week 140): MCD, KO and JNJ. Those are good choices because they don’t need to be backed by an equivalent investment in 10-yr US Treasury Notes or Savings Bonds (, both being available in inflation-protected versions. (You can also use the IEF index fund noted above but that doesn’t guarantee return of your initial investment.) We suggest, along with most investment advisers, that you strive for broad diversification. That means start with one stock from each of the 10 S&P industries. Aside from the 3 industries already represented by MCD (consumer discretionary), KO (consumer staples) and JNJ (healthcare), you’ll want to consider ED (utilities), T (telecommunications), CB (financials), GWW (industrials), ADP (information technology), XOM (energy) and NUE (materials). 

Risk Rating: 4.

Full Disclosure of current investment activity relative to stocks in the Table: I dollar-average into Dividend Reinvestment Plans at for XOM, KO, JNJ, ABT, WMT and PG.

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