Warren Buffett’s Top 5 holdings account for well over 70% of his portfolio. So, my expected Top 5 holding of “only” 30% sounds like small potatoes. Additionally, Buffett has nearly 90% of his portfolio in just 3 sectors (Technology, Financial Services, Consumer Defensive) versus me having 70% in 2 sectors (Consumer Defensive and Healthcare). His portfolio may have more upside but I’ve got less downside when all hell breaks loose (and it always does). We all make our choices and this is something you’ll have to figure out too.
There are as many rules to investing as there are stars in the universe. And honestly, most of the rules are crap. But there are some rules that must not be ignored. Here’s a handful:
- Buy quality
- Buy quality are a fair or better price
- Protect your hard earned capital (e.g. don’t lose money)
- Think long-term
- Don’t put all of your eggs in one basket
These are good but let’s get a little more to specific. Here’s some other basic things to consider, of which these 5 stocks do well:
- No dividend cuts in the past 25 years – This shows they went through the Dot.com, Great Financial, and COVID-19 recessions without having their dividends cut. That is strength! Dividend cuts are hard to swallow and they show weakness in the business model. This is especially true if you are looking out 30+ years to hold a stock.
- No extreme debt burdens – Debt must be paid back, both people and companies sometimes forget that point. When rates were low, companies were piling on the debt. Rates are now rising and it’s going to punish weak companies. In my opinion, just avoid debt riddled companies because it’s not worth the risk. These companies are one recession or black swan event away from destruction.
- Profits – This might sound so ridiculous to even write down but profits matter, especially when dividends are needing to be paid. It may be ridiculous but today I went to a stock screener and it showed ~7,300 U.S. stocks in the screener. When I screened for those stocks that had a positive net profit margin it only showed 2,172. So, over 5,100 of those companies are not making money. Yikes!
- Business model sustainability – This is critical for a 30+ year buy and hold, dividend reinvestment strategy. Technology changes constantly, and its for this reason you will never see a large portion of my holdings in technology stocks. But this can be important to financials and many other sectors too. It’s why I like stocks that have repeatable, basic human need products that can easily evolve with consumer demands. Deodorant and toothpaste will not become obsolete in my lifetime.
To list some characteristics that are even more basic, and these are literally just off the top of my head, I like my largest long-term buy and hold companies to possess (not an all-inclusive list): 50%+ gross margins, “A” credit rating or better, earnings consistency regardless of economic conditions, significant brand quality, and low beta or volatility (these 5 stocks average half the volatility of the entire market).
Listen, I’m not saying I will definitely have 30% of my portfolio in these 5 high quality stocks but my approach says it’s ok to do so. If the price is right and I’ve got the cash then I’ll continue buying these 5 stocks up to the point they are 30% of my portfolio … that’s a promise I will make.
Johnson & Johnson (JNJ)
To reinvest dividends year over year for decades, you need absolute confidence that you will have a big pile of wealth waiting to support you in retirement. As with most of the Top 5 stocks I list, you can have absolute confidence that JNJ will be there and deliver when you retire. I don’t make that statement often but for those on this list, led by JNJ, I’m putting my money where my mouth is. These 5 stocks are the only stocks that I will continue to reinvest dividends while I collect the rest in cash.
JNJ’s brands are top notch. And what I really like about JNJ’s brands is that customers will still be using them long past my time on this earth. Just look at the picture of products above and tell me they won’t be there in 50-years. They will be cash cows, producing high margins that will drive earnings and dividends. I also like that recessions don’t interrupt the sale of these products to much. People still need or want them for everyday life. (Hint: You’ll notice that theme for all of these Top 5)
“Serious investors will have Johnson & Johnson in their portfolio.“
JNJ’s dividend is perhaps one of the safest in the world … now that is a strong statement. What makes JNJ’s dividend so safe? First, they are one of only two “AAA” rated companies in the U.S. The balance sheet, which is driven by outstanding management, is as good as it gets. Plus, their dividend payouts compared to earnings are consistently within the safe zone (under 60%). Finally, their revenue and earnings are strong even when we see horrible economic conditions. Normally, they pay about half their profits in dividends and the other half to grow the business.
Investors always want to see their stock prices rise. Honestly, there is nothing better when you are in the accumulation stage of seeing a stock price that continues to be somewhat flat as it’s earnings grow. This gives you time to build a sizable position in a high quality business. Consider that a gift if your stock is flat for several years. It just gives you time to put money into it every month. Rarely does JNJ go truly “on sale” but it does offer an opportunity to periodically wait for a pullback in the market to own one of the highest quality businesses in the world.
For sure, JNJ will not continue growing like it has in the past. They aren’t a company that swings for the fences but they are as consistent as any on earth. And even though their growth won’t be like it used to be, they will still generate wealth for those that continuously invest in their stock. Any serious long-term investor will have JNJ in their portfolio.
Nestle (NSRGY)
If I could only own one non-U.S. stock, it would be Nestle. Yes, I own Unilever (UL) and Medtronic (MDT) too but if I could only have one my choice is clear. So, when Nestle was down nearly 25% year-to-date, I jumped right in and started an initial ~$13,000 position. This isn’t a dig at Unilever, Medtronic, or any other non-U.S. company by any means. But as they say in the movie The Highlander, “there can only be one” and for me that is Nestle.
For the every great non-U.S. company, you can probably find a suitable U.S. stock that will do you just fine without the risks that come from owning international companies. Kraft Heinz, General Mills, JM Smuckers, and more are just a notch below the largest packaged food and beverage manufacturer in the world. When you focus on holding stocks for 30 years or longer, then you have to focus on the best of the best. And the best get the most attention in your portfolio.
Its dividend is only paid annually, which turns some people off from the stock. And you do have to deal with tax withholdings and credits, which is a pain in the rear, and this means you don’t want to own it in a retirement account (only use a taxable account). But if these are the reasons to not hold this company then you’ll be missing out on one of the finest companies in the world. Truly, if there was a company that allows you to hold forever, pass on to your kids and grandkids, and sleep well at night then you need to own Nestle.
“If I could only own one non-U.S. stock, Nestle would be that one.“
It’s well managed, has excellent returns on equity, strong net margins, and leading brands. This stock is only for long-term buy and hold investors. If you are going to reinvest dividends for 30+ years then you want to make sure all those reinvested shares are safe and will produce greater wealth.
Are you are avoiding Nestle to invest your hard earned money in a company with a higher dividend yield, that doesn’t have currency risk, that doesn’t have tax withholding and tax credits to figure out, and that pays a quarterly (vs Nestle’s annual) dividend? If so, then I’d say you are making a big investment mistake. Nestle will be one of the last companies standing if financial armageddon were to strike the world.
One final word on Nestle. If you are buying and holding high quality dividend paying stocks then DO NOT overlook Nestle. For the reasons mentioned above, many people don’t own it and that is a big financial mistake.
Coca-Cola (KO)
A few years ago, I was bored so I watched a CNBC show and someone was talking about Coke. To paraphrase, “Why invest in a flavored water stock like Coke when you could invest in [insert technology company name here] because it’s the future?” Well, that has been answered time and time again and Coke continues to be the future. Most recently, Coke is up over 6% in the first half of 2022 and over 16% in the past 12-months while [insert technology company name here] is down 40%, 50% or 70%. And we get some dividend too, which 99% of the technology companies don’t pay. Enough said on that!
During every economic crisis, companies like these Top 5 (Coca-Cola included) have seen it all and continue to grow dividends and make money. Remember, we are trying to construct a portfolio whose businesses could maintain (and perhaps even grow) their profits when (not if) the world gets ugly economically. That is when you are happy to have 6% of your portfolio in a company like Coca-Cola.
“Coca-Cola is likely Warren Buffett’s great investment ever!“
Sure, it’s hard to watch TV and see the interview of the Tesla millionaire who put all his retirement funds into one stock and hit a home run while you just got a $500 quarterly dividend check from Coca-Cola. But when you are retired, you’ll be so happy to receive that $500 check because you know that Tesla millionaire will likely lose his fortune by the time you get your next quarterly check. Boring stocks deserve a big chunk of your investment funds. You can still own Tesla but make sure it’s only 1% of your total funds. And by the way, that $500 quarterly dividend will likely be $1,700 in 30 years.
In a world of high-flying, innovative stocks that grow 25% per year, what’s the appeal of having Coca-Cola in your portfolio? The point of constructing a portfolio is to balance its contents so that it meets your needs. But regardless of those portfolio needs, you still need a core few companies that will continue growing their business when the world is crashing down economically. That’s why you own Coca-Cola.
Procter & Gamble (PG)
There are several ways to build wealth over a lifetime. Many do this by building their own business. Some use real estate. And then some consistently buy high quality companies like Procter & Gamble and hold them for an entire lifetime.
Charlie Munger often spoke of avoiding “going back to Go” (a Monopoly analogy) when it came to investing. If there was ever a company that won’t “go back to Go” it would be Procter & Gamble. While PG is up 8% in the past 12-months, companies like Shopify or DocuSign are down over 80%. A company like Procter & Gamble is sturdy, reliable, boring and when investing for decades that’s exactly what you need for a core investment.
If you are going to reinvest the dividends for 30 or 50 years then that company better: (1) survive for 30 or 50 years and (2) it better keep paying dividends when you need to live off of them in retirement. And once again, that’s why you invest in a company like Procter & Gamble.
“Thank you for being a friend!”
Let’s put this another way. You might have 50 “friends” but when it comes right down to it you probably really only have 4-5 really good, reliable friends that you can count on. Well, that is Procter & Gamble in the investing world. PG is one-third less volatile than the entire market. That’s why it’s a core holding that can take on a greater position that most other stocks.
During the severe recession years in the early 1960s, 1973-1974, and 2008-2009, Procter & Gamble remained profitable and never saw their profits fall by more than 10%. That is the definition of quality, when even during the worst economic events the profit machine continue’s to build wealth. Purchasing just 5 shares per month would give you an investment worth hundreds of thousands (perhaps millions) by the time you retire. And if you do this with the other 4 stocks listed in this article, I’m confident you’ll be a millionaire many times over.
PepsiCo (PEP)
Pepsi, along with most of its brands, is one of the most recognized companies in the world. For many, the Pepsi trademark elicits images of its taste superiority versus Coke. Pepsi is a beverage heavyweight, but its business now extends into snacks too, with Frito-Lay and Quaker products accounting for over half of sales. Pepsi has scale, many valuable brands, and a wide breadth of a portfolio, which gives it a wide moat and competitive advantages.
When I was a stock broker many years ago, some of my older and wealthier clients told me stories of how they bought Coca-Cola, Pepsi or Procter & Gamble over the years. Slowly, those shares were worth hundreds of thousands or millions. When these people died, their family members would be shocked to learn that mom and dad had acquired so much money in high quality companies. And many of them did this on average work salaries.
Most people (as in 99% of us) don’t acquire 1,500 shares of Pepsi at $170 per share all in one big purchase. Rather, most people buy the company $500 or $1,000 at a time, little by little over years. And with dividend reinvestment and time, they suddenly find themselves with $200,000 or $400,000 of a single high quality company when they retire.
When we talk about replacing work income with passive income (like dividends), building up significant positions in companies like Pepsi is the way to get there. And let’s not forget that companies like Pepsi spinoff divisions to create (or unlock) value. For example, Pepsi did this in the late 90’s when they would spinoff Yum, which was their fast food restaurant’s KFC, Taco Bell, and Pizza Hut.
Last word about Pepsi. This company was the last to be included in my Top 5. Why? Because I already had Coca-Cola and Nestle on the list. But it’s their strong combination of beverage and snacks along with their long dividend payments that brought them into the mix. At an absolute minimum, they should be in everyone’s Top 10 but I pulled them into my Top 5 because they will survive/thrive and so will their dividend. And if Warren Buffet can have 90% of his stocks in 3 sectors and 70% of his money in his Top 5, then I sure as hell can include Pepsi in my Top 5.
Summary
Picking companies that will last 30 or more years can be difficult, for who knows what consumers will want in that far off future. That might be true in the technology space, which seems to change every 6 months. But when it comes to diapers, drinks that have been around for over 100 years, or products who’s name is an entire industry (e.g. Band-Aid or Q-Tip) you can feel more comfortable knowing they will be around for another 50 years.
One trait of all of these companies is they are almost always within their fair value range. That’s what consistent long-term growth companies achieve …. predictable and less volatile than most. If you are parking 30% of your funds in only 5 companies then that’s what you are looking to achieve.
And remember, my biggest and most basic requirements for long-term stock ownership: (1) the company must survive and (2) they dividend must survive. These five firms were likely still profitable even during the Great Depression and certainly during most any recession that the markets can throw at our portfolio.
Warren Buffett has said that you should buy a high quality stock and pretend that the market was shut down for 10 or 20 years. In other words, hold that stock for a long time. If you do think like this then it changes the kind of companies you might buy. These Top 5 stocks could withstand a 50-year sleep and they’d still be in operation when you woke up.
Whenever my wife comes back from the store, I glance at the goods that she unbags and I quickly calculate which of our stocks we just supported. Nearly every trip to the store results in these 5 companies receiving some of our dollars. Every share you own of Pepsi, Coke, Johnson & Johnson, Procter & Gamble, and Nestle makes you an owner of the best brands in the world. That’s why these 5 will get 30% of my dollars. Investing in stocks doesn’t need to be difficult. Just buy these kinds of companies at the right price and you will create wealth. It’s that easy!
Thanks for reading!
Mr. TLR