At work, I’ve been lucky enough to hire my entire team …. each person has been hand picked. I’m very picky in the hiring process and my interviews can take hours and multiple comebacks. It’s important to get the right person on the team. Hiring the wrong person means we’ve got a mess on our hands and something has gone wrong.
It’s the same with buying stocks. I get to hand pick each stock that makes it into my portfolio. It’s pretty cool and it’s critical that you get it right. We’ve talked a lot on this blog about avoiding “stupid” mistakes and that’s why I created my Master Stock List. The list is thorough and I’ve taken my time to create it.
Last year, I designated certain stocks as “approved” to have a higher weighting in my portfolio. These stocks have certain characteristics that has earned their way onto the list. And the higher the weighting the higher the quality. And even within the list reside certain companies that I consider core holdings. These core holdings are quality and defensive stocks purchased at a good value.
As I described in March 2020, consumer defensive and healthcare are an excellent place to be. You get plenty of upside but lower downside risk during tough times. These core holdings have a lower beta (less than 1) when compared to the market. And they have strong records of paying dividends. A strong core of quality defensive stocks will protect your portfolio in many different economic situations. The trick is to get the right core stocks because building up on the wrong ones could be terrible to your retirement.
If you have 8-10 stocks that are your core, it’s then possible to build around them. These stocks could become 40-50% of your portfolio. The other holdings could be higher yieldings or stocks with more growth potential. But it’s important to know your core is built on the right foundation. It doesn’t mean these stocks won’t go down but they will likely recover quickly. They usually come with premium pricing so you timing must be good.
I Know What I Own
Just looking at the picture below makes me feel very comfortable and I sleep well at night. Of course, some are of higher quality than others but I know each company very well. And likely, so do you! That’s what I want my portfolio to look like …. it needs to be familiar to me and my wife. When I die, I want my wife to easily know what each company does that we own.
I hold 12 stocks now and might hold around 25 when all is done. So basically, I’m about half-way there. For core holdings, I’m looking for quality defensive stocks at a good value. There are so few companies that could come close to that description. For a core holding, I’m not looking for the 40th best quality defensive company I’m looking for the best.
I know it sounds simple but if I’m putting 4-6% of my portfolio into each of these stocks, the basics of investing become very important. First, I need my stocks to survive in a severe economic downturn or evolutionary business change. This means quality, both in balance sheet and product. This might sound like a very low bar to set but it will eliminate a lot of stocks.
Second, I need my stock dividends to survive. Growing dividends is great but stable is critical during bad times like these. Nobody wants to see their dividends cut. We thought Royal Dutch Shell, which hadn’t had a dividend cut since WWII, was solid. A 66% cut last year was punishing for those retirees that live on a fixed income. It was my first dividend cut, it reduced my forward income by over $500 annually, and it made me rethink my stock ownership priorities.
Of my current list, I’d say two stocks fit my definition of being core stocks – Johnson & Johnson and Coca-Cola. The rest of my stocks are good and I’m excited to own them but they aren’t to those two levels.
And I Know What I Want – Quality Consumer Defensive
It’s an interesting feeling when your portfolio starts to grow. The more stocks you own the more you care about what gets added to “the family.” I’ve become more patient as I add stocks to the portfolio. I do not want to own 50-100 stocks … I’ve seen those portfolios and it’s not something I want to track.
“For core holdings, I’m looking for quality defensive stocks at a good value.”
So, in the absence of quantity, I’m completely focused on quality. When you look at the picture below it screams quality and consistency. I will own these stocks but I’ve not had the cash to buy them when they were down so I wait for my next opportunity.
One thing is for sure, I will not overpay to own them though. But they will come down in price at some point in time and I’ll be ready. I’d be happy to own nearly any stock on my Master Stock List but these 5 will bring a quality dividends and quality during any economic environment. In retirement, this is exactly what I’m looking for.
I like to buy quality defensive stocks in two ways:
- Position Building
- Market Corrections
Position building means I need to know the general ballpark price I’m willing to pay for a company. A combination of factors can help in your process. Once I know my target then I build a position over time. One month I might have Coca-Cola in my price range and the next month I might be adding to Johnson & Johnson. That’s exactly how I got into these two core stocks. Because stock prices fluctuate, it allows me to only purchase stocks that are below my price targets.
Some months I don’t buy anything so my cash builds up until something comes below my buy target. I like to have cash around (easier said than done) for the occasional moments when there’s a market correction. When this occurs, I focus completely on the highest of quality stocks that usually have premium prices. These stocks are usually the ones that recover quickly and lead the rest of the market. They don’t stay down long so grab them while they are down.
Summary
During good times, it’s easy to lose sight of fundamental stock ownership requirements. I mean absolute low-level needs if you are going to purchase individual stocks. This is especially true for near and current retirees. These expectations might read as overly simplistic but investors continue to lose sight. The stocks most likely to survive and keep paying dividends are those handful of highest quality defensive stocks.
You really can’t go wrong buying Johnson & Johnson or Procter & Gamble or PepsiCo when they are down. The stocks will survive nearly any economic condition and will continue paying dividends. Any respectable buy and hold investor will have these and a handful of other core holdings in their portfolio.
Remember, my list stocks will always look different than another person’s portfolio but they should all have some core stocks. I considered adding Apple and Visa to my core list but I didn’t. I’ll still probably own them someday but that doesn’t mean they are core to me. My objectives are growth and income with an emphasis on income. Another portfolio may focus on growth and income with an emphasis on growth. Or, you may just want a growth portfolio. It takes all kinds so include whatever your consider a core stock to your portfolio.
For me, that’s quality consumer defensive stocks with a track record of growing their dividends.
Thanks for reading!
Mr. TLR