Stock Gumshoe readers clearly have a yen to find out which stocks are safe enough to “hold forever” — I wrote about a teaser from Paul Tracy for StreetAuthority’s Top Ten Stocks almost two months ago, but my plans to finish it up and complete the list of stocks for you drifted away in the dog days of Summer.
But you, dear readers, insisted — I’ve had tons of folks asking why they can’t find “part two” of our look at Tracy’s ten best stocks, and though I’d be delighted to tell you that it’s just a problem with the new site design and our search feature, I’m afraid the real problem is that I didn’t write it yet.
And that, I’m delighted to say, is a solvable problem — surely a rarity these days.
If you missed out on the basic idea behind this pitch, it’s that there are stocks with dramatic long-term performance that are held by lots of bigwig investors and politicians, and you can buy the same stocks they own. Here’s a taste:
“One of our “Forever” stocks is owned by a staggering 22 members of Congress. James Sensenbrenner Jr. (R-WI) reports that via his wife, he has a stake of up to $500,000 of the stock. And in 2010, that stake earned at least $15,000 in dividends from the shares.
“You can see for yourself in his latest financial disclosure I had our research team dig up on the Representative:
“Here’s the funny thing. When you find a stock that a herd of Congressmen love… you usually find that some of the richest people in the world also invest in it. It’s almost like there is a direct link between the two…
“In fact, Representative Sensenbrenner and his wife could shake hands with the world’s richest man — Mexican telecom magnate Carlos Slim — at this company’s annual meeting. That’s because along with a couple dozen members of Congress, Mr. Slim also has a stake in this world-dominating company… owning more than 12,550 shares worth $879,000.
“It’s the same story with another ‘Forever’ stock we found.
“It’s owned by dozens of the market’s biggest players. Legendary investment firm Fidelity owns more than 15,500,000 shares worth almost $8 billion. T. Rowe Price holds over 10,100,000 shares, according to Bloomberg.
“Twenty-five members of Congress also own the stock.
“That includes Jane Harman — the second-richest member of Congress, with an estimated net worth of $293 million. That is to say she was the second-richest member of Congress.
“Ms. Harman resigned in 2011. At last count, she held over $250,000 in this company’s stock.
“But what’s most surprising about this select group of 10 stocks we’ve identified? It’s not the fact that millionaire Congressmen… or billionaire ‘super’ investment firms like Fidelity and T. Rowe Price… are lining their pockets with the shares.
“Instead, it’s that everyday investors like you, your family, and your friends are able to invest in these exact same companies.”
So there you have it — what could go wrong, right? Of course, the fact that Jane Harman has $250,000 invested in a stock means less than one tenth of one percent of her portfolio is in this stock, which ain’t exactly the kind of conviction that you’d think would maker her move hell or high water to get that firm some gummint contracts … but still, I like the idea of “forever” stocks even if we have to put quotes around the “forever” part — I’m a big believer that long-term positions in strong, growing, dividend-paying companies that can compound your money over decades is probably the best foundation for an investment portfolio, even if I sometimes am less disciplined than that in practice.
Or, as Paul Tracy puts it:
“I believe the simplest way to turn any amount of money into a windfall is to find a stock you want to hold forever, invest, and then forget about it.”
That’s the way most of us were taught to invest, and there’s a certain logic to it — along with, as we’ve learned over the last decade, a fair amount of risk if you do the first part (the “find a stock” bit) poorly … many brokers don’t even like to use the terms “blue chips” or “widows and orphans stocks” anymore, and it’s not just because big stocks (like Eastman Kodak most recently) sometimes die long, slow deaths but because everyone now watches their portfolio tickers on an hourly basis and is now so much more focused on the minute wriggles of the global economy — even if you do “find the stock” right, having patience to let it grow and compound is far more difficult today than it was 50 years ago, when you might only check on the stock tickers of your holdings in the newspaper from time to time.
So let’s look into the remaining teasers, shall we? I think I covered six of ‘em back in early August when this ad began to run (BIP, GOOG, PM, MA, AMJ, MKL for the quick shorthand), and most of those stocks are still within a pretty short hop of where they were then, so we’ll look at the clues for the rest … Oh, and that one that’s “owned by dozens of Congressmen” is Google, by the way, so that’s already on the list …
“‘Forever’ Stock #4 is a fund whose job is simple — invest in the most stable utility stocks on the earth and pay investors a fat dividend yield.
“It owns telecoms in New Zealand, electric companies in Brazil, and energy businesses in Wisconsin.
“It’s returned 11% per year since its inception in 2004… and it has boosted its dividend 28.9% along the way. In total, the fund has paid 89 consecutive dividends and currently yields 6.0%.
“But don’t expect to have heard of this one… it trades only 80,000 shares a day — about what Apple trades in two minutes.”
This one must be the Reaves Utility Income Fund (UTG), a closed-end fund run by a utility-specialist investment firm that’s been around for about 50 years (the managers, not the fund — the fund IPO’d in 2004). They basically take the relatively small universe of what they consider to be “utility” stocks (a few hundred), pick their favorites, and manage that portfolio. Oh, and they also borrow money to magnify their returns (and their risk, which is why the shares of the fund collapsed in the credit crisis, though they recovered fairly quickly).
They use a pretty broad definition of “utilities” — they currently hold a bunch of high-yielding telecom companies (AT&T, Verizon, BCE, Frontier) and a few MLPs along with the more traditional electricity, gas, and water utility companies (and a few oddball names, with tiny positions in Annaly Capital, Cellcom Israel, ExxonMobil, Nalco and the like). There are some foreign names in the list, but the majority are US companies.
Closed-end fund usually trade at a discount to net asset value, but in some cases, as with this fund, they trade at a premium — the fund is currently trading for about 8% more than the underlying investments are worth. There are some times when it works out to buy a great Closed end fund at a premium, but it’s certainly risky and represents another kind of leverage — if utilities fall out of favor or their performance slips, the shares would undoubtedly fall due to the drop in price of the stocks they hold, but would probably also fall further because investors would no longer be willing to pay a premium over the net asset value if performance were flagging.
Right now UTG is levered up 37% (meaning they have borrowed 37 cents to expand the portfolio for every dollar they raised by selling fund shares), which seems like a lot to me, and that and the telecom and MLP holdings help them to pay a far higher yield than the average plain-vanilla utility (yield right now is 6.5%, the average big utility yield according to the Utilities Select SPDR — ticker XLU — is about 3.9%). They have a 1.5% management fee, which isn’t that crazy for a closed-end fund but certainly counts for something. You can see the basics on their portfolio, leverage, and historical premium/discount valuation from the closed-end fund association here.
I’d be inclined instead to maybe buy a couple telecom shares and a low-fee utility etf (like Vanguard’s Utilities fund, VPU) rather than lever up like this with a riskier profile just to get another percentage point of dividend yield, but that’s for you to decide … it is, after all, your money.
“‘Forever’ Stock #7 is a fund that holds more than 260 of the fastest-growing companies in the world. But you won’t find these companies here in the United States.
“That because this fund only invests in fast-growing emerging markets like Taiwan, Brazil, and Malaysia. At first glance you might think that’s risky… until you think about where our economy is in the United States.
“Here at home we’re struggling to see 2% economic growth… and that’s with massive stimulus spending. But Brazil’s GDP grew at a 5.4% annualized rate in the first quarter of 2011 alone. Economies like Taiwan, China, Brazil, and others are growing 2X or 3X faster than the U.S. economy. This ‘Forever’ idea is one of the best ways to profit from that trend.”
So are those clues enough to identify the ETF? Not really, there are several decent ETFs that are widely diversified (more than 260 stocks, as teased) in emerging markets stocks, including the granddaddy for the sector, the MSCI Emerging Markets index ETF from iShares (EEM). But a commenter on the first article suggested the WisdomTree Emerging Markets Equity Income Fund (DEM) as the match and I like that one a lot better than the index, so we’ll go with that — DEM, like most of the WisdomTree funds, is fundamentally weighted … meaning that they weight the percentage of the investment in each stock by the valuation and/or the dividend yield of that stock, not just by the size (as with the S&P 500 or most market cap-weighted indexes, including EEM).
Market cap weighting means you put the vast majority of your holdings into huge companies that everyone knows about — which isn’t necessarily terrible, but there’s been a lot of research to support fundamental indexing/weighting instead. So while EEM’s largest holdings are Samsung, Gazprom, Petrobras, China Mobile, Vale — stocks we all probably have heard of, DEM’s top ten includes some cheaper “value” and income picks like Taiwan Semiconductor, Banco do Brasil, Malayan Banking Bhd, Chunghwa Telecom, Kumba Iron Ore and the like. And it carries a current dividend yield of almost 4%, versus about 2% for EEM and has outperformed EEM by a bit for most of its existence (though, to be fair, that’s a very short measuring stick). The two funds have almost identical expense ratios, by the way (around 0.65%) and pretty wide diversification across the top 10 or 15 “emerging” countries, though DEM has far more allocated to Taiwan and Malaysia right now and almost ignores mainland China, which is the largest allocation for EEM.
So I can’t tell you for sure that DEM is Tracy’s “Forever” pick, it ain’t half bad as a play on the theme he hints at. If you’ve a preferred fund that aims for this same target, feel free to shout it out with a comment below.
“Every $200 you invested in ‘Forever’ Stock #8 back in 1972 would be worth $280,000 today. Maybe that’s why it’s one of Congress’ favorite ‘sweetheart’ stocks. In total, more than 50 members of Congress own a stake.
“Former Presidential Candidate John Kerry and his wife own at least $452,000 worth.
“Meanwhile, the company is raising its dividend, spending billions to buy back its own shares, making smart acquisitions, and according to investment research firm Morningstar, owns an ’80% stranglehold on a $30 billion market…’”
Well, since we’re given the year 1972, that massive growth rate, and the “80% stranglehold” and “$30 billion market” stuff … the Thinkolator tells us that this must be … Intel (INTC).
Another stock I own and am happy to endorse, by the way. The computer microprocessor market was estimated at being around $30 billion a year by Morningstar, and Intel does own about 80% of that market — enough of a monopoly that it seems like Intel tries to prop up AMD just enough so they can tell regulators that it’s not really a monopoly.
Intel certainly has challenges, but personally I think the idea that the mobile world will be their downfall (as Qualcomm and Arm Holdings, among others, dominate mobile chipset designs) is a bit overdone — as is the notion that personal computers and laptops will disappear because you can buy the iPhone in Shanghai.
OK, I’m exaggerating — but so, I think, are those who see Intel’s business evaporating to the point that they’ll only pay 9X earnings for a near-monopoly that yields 4% and is still growing … even if that growth is challenged to some degree. Intel has $10 billion in cash to spend, and they’ve proven that they will invest in R&D and invest in mobile chips, even if they’ve had stumbles in mobile so far. You may see better growth opportunities in smaller chip stocks, for sure, but not many who can pay out a high current yield and increase that dividend. Change happens, and dominant market positions can erode, but Intel’s not eroding yet … and rarely does that decline come about as quickly as investors fear.
And one more to close out the “10 best?”
“I looked all the way to Brazil for ‘Forever’ Stock #10, but don’t worry… it trades right on the New York Stock Exchange.
“It’s the largest electricity transmission and distribution company in Brazil, boasting more than 6.5 million customers. Like many utilities, its profitability is also supported by its monopolistic position. Roughly three-quarters of its total power sales are to captive customers who do not have the option of switching to another electric distributor.
“Meanwhile, the company makes semi-annual dividend payments, with a policy of distributing at least 50% of net income. The two most recent dividends add up to $1.60 per share, giving the stock a yield of 6.0%.”
This one, sez the Thinkolator, is big Brazilian Utility CPFL Energia (CPL) — they do reach “more than 6.5 million” customers (they say 6.7 million) — and they do say they’re the largest public company in the sector, though there are some other big ones. The trailing yield, per Yahoo Finance, is 5.7%, so not bad but also not particularly high for a Brazilian company. Interest rates are far higher than that in Brazil, with benchmark rates around 10%, so as a utility they’re paying 6% while folks with a savings account might get a bit more than that. And thanks to regulation and tradition, Brazilian companies generally pay a high percentage of their income as dividends, 50% is fairly typical. As with most utilities, CPL pays out far more than half of their income as dividends so the “promise” of at least 50% is not particularly critical at the moment.
There are other electric utilities in Brazil if you’re interested too, including ElectroBras (EBR), which has a more global presence and similar yield, and there are several other regional power utilities with investments in Brazil, including Chile’s Enersis (ENI). I have not looked closely at them and I don’t know the Brazilian utility market particularly well, though I find it surprising that the yields are not substantially higher given the interest rate environment in Brazil. If you’ve a favorite South American yielder or more info on CPL and its competitors, feel free to share your thoughts with a comment below.
So there you have it — some utilities and foreign exposure and a big ol’ tech stock, think they’re “hold forever” material? Let us know with a comment below.
For full disclosure, I own shares of Google, Markel, Berkshire Hathaway, Verizon, and Intel of the shares mentioned above. I will not trade in any stock covered for at least three days.