Streetwise
Lauren Rudd
Sunday, December 8, 2013
Stocks From Last Year
The period between Thanksgiving and the start of a New Year
is an excellent time to work on your portfolio. In doing so, you should strive
to create a return that exceeds the sum of what a 30-year treasury bond would
pay, along with what you will lose through taxes and inflation along with an
equity kicker for risk.
The guideline I give my students is a minimum annual return
of 12 to 15 percent. A prudent stock selection process should enable you to meet
that objective. On the other hand, investors like Warren Buffett believe that
future long-term stock market returns can be estimated as nominal GDP growth
plus expected dividend yield.
According to that formula next year’s estimated 2.8 percent
nominal GDP growth rate plus an average 3 percent dividend yield equals an
expected return of 5.8 percent. Many believe an additional 3 percent should be
added for the risk you underwrite by investing in stocks, bringing the minimum
expected return to 8.8 percent. However, as mentioned above, I believe in a
minimum total return of about 12 percent.
To achieve that goal, you will need to become a
market-trouncing master strategist. Your knowledge of a given company must be
superior to that of others. To help you in your search, each year at this time I
offer up 12 possible research candidates, whose performance I review a year
later. (Note: Abbott spun off AbbVie resulting in 13 companies this year.)
Here are the stocks from last year and their percentage gain
or loss: Looking at the equities, Apple (AAPL) down 3.4 percent, AbbVie (ABBV)
up 43.3 percent, Abbott (ABT) up 23.1 percent, Aflac (AFL) up 24.2 percent,
Gilead (GILD) up 95.9 percent, MWI Veterinary Supply (MWIV) up 55.5 percent,
PetSmart (PETM) up 4.6 percent, and Valspar (VAL) up 14.5 percent.
The capital appreciation for this group was 21.78 percent
with a dividend yield of 2.01 percent for a total return of 23.79 percent versus
about 29 percent for the S&P 500.
To offset the aforementioned low dividend yield, the other
five issues were split between master limited partnerships and real estate
investment trusts, both of which payout about 90 percent of their earnings to
avoid Federal income tax. Therefore they generate a high dividend yield that is
directly proportional to earnings.
Unfortunately, rising short-term interest rates put a lot of
pressure on these two sectors. In addition, actions by China further damaged the
share prices of Terra Nitrogen and Southern Copper. Both companies are major
players in their respective markets but were forced to deal with exogenous
issues beyond their control.
Here are the performances: American Capital Agency (AGNC)
down 34.5 percent, Kinder Morgan Energy Partners (KMP) up 1.5 percent, National
Retail Properties (NNN) up 2.1 percent, Southern Copper (SCCO) down 31.4
percent, and Terra Nitrogen (TNH) down 23.2 percent. The capital appreciation
for this group was a negative 13.4 percent but with a dividend yield of 8.5
percent.
For the full group of 13 securities, the overall dividend
yield was 3.82 percent with an overall capital appreciation of 12.06 percent for
a total gain of 15.88 percent, which is in line with the previously stated goal
of 12 to 15 percent despite the agonizing returns from the MLPs and REITs.
Yet, all this is ancient history. The key question is what 12
stocks can I come up with that might tickle your fancy going forward? In today’s
market environment dividends are increasing crucial to your portfolio’s
performance. Therefore, I will concentrate on companies that have a multi-year
track record of not only paying but also raising dividends.
Next week I will give you my suggestions for the upcoming
year and provide a little background as to why they were selected. Please keep
in mind that these lists are not intended to be an instant portfolio where you
simply add water and stir. Rather they are designed to be a catalyst to
stimulate ideas and thinking on your part about possible sectors and companies
you might want to investigate. And hopefully doing all that research keeps you
away from the eggnog.