Week 196 - Stockpicker's Secret Fishing Hole: 20-yr Returns

Situation: We started this blog 4 years ago because we saw an inconsistency in the way people plan for retirement. The same inconsistency affects the way most investors buy stocks. They’re looking for exotic investments, often in foreign and small-cap companies (or mutual funds that target such companies). Why? Because the S&P 500 Index has imploded twice on them since 2000. So, they choose to ignore the 800 pound gorilla in the room (large, well-established US companies), particularly the boring companies like utilities and transports. In other words, they ignore the very companies that make up the 65-stock Dow Jones Composite Average (DJCA). This makes no sense, given that the DJCA outperforms the S&P 500 Index long-term, and does so with less volatility. So, we started our blog with the Growing Perpetuity Index (stocks in the DJCA that are Dividend Achievers) and have highlighted the DJCA by calling it the Stockpicker’s Secret Fishing Hole (see Week 68).  

But we’ve never made a comprehensive assessment of all 65 companies. This week’s blog tries to do that. Eight of the companies have been excluded because they are either too small to be in the Barron’s 500 List or don’t have total return records extending out to 20 yrs; 21 more were excluded because of being unsuitable for retirement portfolios (i.e., they had an S&P credit rating less than BBB+ and/or an S&P stock rating less than B+/M). Three of the remaining 36 were excluded because of having greater price volatility (variance) than the S&P 500 Index over the past 20 yrs. 

Not surprisingly, the 33 companies in this week’s Table have outperformed the DJCA over the past 20 yrs (compare Line 35 to Line 44 in the Table under Column C). And, the DJCA had a 20-yr total return that beat the S&P 500 Index by more than 10% (compare Line 44 to Line 45). The problem is that you’ve heard of many of those 33 companies and often use their products. So, there’s nothing mysterious or exotic about investing in those companies; none are the “diamond in the rough” you can talk up at cocktail parties. Your stockbroker understands human nature, so she won’t be talking up those names either. 

Let’s go down the list and see which stocks have outperformed the S&P 500 Index over both the past 5 and 20 yr periods. There’s JB Hunt Transport Services (the most commonly encountered trucks on the interstate), NextEra Energy (you know wind and solar power are growth industries but maybe you didn’t know NextEra is the leader), Nike (no one can be surprised by its continuing outperformance), and Travelers (any insurance company that knows how to price risk is a good investment). There’s 3M and the 3 railroads (Union Pacific, Norfolk Southern, and CSX), as well as Walt Disney and Home Depot. (You probably aren’t surprised to learn that all 6 of those are perennial money-makers.) UnitedHealth Group is the leading purveyor of health insurance (maybe you didn’t know that). Boeing and American Express round out the list of companies you already expected to continue raking in the cash. I had a stockbroker who didn’t mention any of those companies to me in over 30 years, although he did recommend others on the list: United Technologies, Cisco Systems, Intel, Caterpillar, ExxonMobil and Johnson & Johnson. 

Bottom Line: You have little time to research stocks, so focus your attention on a shorter list than the S&P 500. Try the 65-stock Dow Jones Composite Average (DJCA), which also happens to outperform the S&P 500 over the long term. All 65 stocks are picked by a committee headed by the Managing Editor of the Wall Street Journal. We’ve trimmed the list down to 33 that can fit into a retirement portfolio. Take particular note of the 19 that are S&P Dividend Achievers (i.e., companies that have increased their dividends annually for at least the past 10 yrs). Eleven of those have a Finance Value (see Column E in the Table) that beats the Finance Value for our key benchmark, VBINX, which is the Vanguard Balanced Index Fund: WMT, MCD, ED, SO, NEE, NKE, IBM, JNJ, KO, XOM, CVX. Inflation has been 2.1%/yr over the past 20 years, and the average 20-yr dividend growth rate of those 11 stocks has been 11.6%/yr (see Column H in the Table). If your retirement portfolio were to contain equal dollar amounts in each of those 11 stocks, your dividend checks would be growing 9-10% faster than inflation, every year. Think about it.

Risk Rating: 5

Full Disclosure: I dollar-average into WMT, XOM, MSFT, NEE, NKE, and JPM. 

NOTE: Red highlights in the table denote underperformance vs. our key benchmark, VBINX. Values in the table are current as of the Sunday of publication.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com