How does the old saying go? If I had known then what I know now, would I have done a lot of things differently? The cliché has survived because it strikes at the heart of a perennial problem with people – we tend to earn most of our wisdom by making costly mistakes. Investors are hardly immune.
If I had the chance to go back in time and start over with $ 5,000 capital, here are the five stock choices I would make as long-term pillars of my portfolio, allocating $ 1,000 each to each.
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is of course the parent of search engine Google, YouTube, a business cloud computing platform, and a handful of other less impactful companies. It faces competition in all of these key markets, but at least when it comes to the first two, it still dominates. This is not likely to change. GlobalStats’ stats counter shows that Google manages 92% of the world’s web – a significant lead the company has enjoyed for over a decade. YouTube, meanwhile, has quietly caught up Netflix in terms of income even if it produces these income quite differently. Alphabet is also the dominant name in the arena of mobile operating systems; its Android operating system is found on nearly 73% of the world’s mobile devices, according to GlobalStats.
Alphabet is going to be hard to dethrone as the effective king of these markets. The much bigger threat, however, is the decision of consumers to start using the Internet less than they currently do. But, one way or another, it also seems incredibly unlikely. This business remains a growth machine as well as a cash cow as long as it is.
Just for the record, while I expect to always respect the drugmaker Merck (NYSE: MRK), my interest in actually owning it is heightened in light of current circumstances. Unlike most of the rest of the market, Merck shares are down 5% in the past 12 months and 16% since the end of 2019. The end result is a 3.5% dividend yield and a forecast price- profit ratio less than 11.
I suspect this weakness reflects the fact that Merck has never been a key participant in the race for COVID-19 vaccines and treatments, which have captured the attention – and money – of investors. Largely forgotten thanks to the noise of the pandemic, however, as all the other diseases and illnesses in the world have not gone away, and Merck continues to treat them with its impressive portfolio of drugs. Take Keytruda, which fights cancer, for example. Merck sold Keytruda for $ 14.4 billion last year, up 30% from 2019 sales, but still miles from the drug’s expected peak sales of around $ 23 million. And that’s just one of the company’s many franchises.
Just for the sake of diversity, I would add a financial name to the mix. I think JPMorgan Chase (NYSE: JPM) is the best of the breed at the moment.
Not everyone is that enthusiastic about bank names right now, and that’s understandable. Interest rates are apparently stuck at all time lows, and although Federal Reserve governors are now planning a rate hike next year and at least one more for 2023, they are likely to be unusually low for years to come. This is a problem for banks because the profit margin on loans is lower when interest rates are removed than when rates are high.
The point is, interest-based income is only about half of this company’s bottom line. Most of the other half is somehow tied to capital markets, which is the fancy term for investment income. As long as people want to make their money grow faster than inflation devalues it, the world will support a name like JPMorgan Chase.
The kicker: The dividend growth here is impressive. The current annualized payout of $ 3.70 per share is more than double what the company distributed 29 years ago, and that’s with lower dividends resulting from the subprime mortgage crisis in 2008.
You will not earn any significant dividend income from Microsoft (NASDAQ: MSFT), but that’s not the point here. On the contrary, owning Microsoft is a way to connect with a bunch of different businesses operated by the iconic software company. Video games, personal productivity, cloud computing, web advertising solutions, operating systems, and even LinkedIn are all part of a company’s revenue-generating repertoire. Like Alphabet, Microsoft’s leadership in its lines of business is secure as long as the world continues to use internet-connected devices.
What really makes Microsoft a staple here, however, isn’t the breadth of its business. It’s because by selling so many of its subscription software platforms, the company has become an incredible recurring revenue machine. Microsoft is not disclosing all key details on this aspect of its business, but it said in its latest earnings call that there was $ 141 billion in “performance bonds remaining” on the books, up from more than 30% year on year. This is in reference to subscription access to software that will be provided in the future.
Finally, I add Verizon Communications (NYSE: VZ) to my personal long-term list of choices if I had the opportunity to start all over again.
This choice is not so much aimed at diversifying into the telecommunications sector as it is at entering a name which is currently earning 4.7%. However, I am not interested in reinvesting those dividend payments in more shares of Verizon. Rather, my end goal is to inject regular, reliable cash that I can use to make new purchases without putting more outside money in my wallet. This way I have the flexibility, including the option of not having to sell another position at a low point just to free up money for a new pick.
And there’s no doubt that Verizon will be able to serve as that title for a long, long time. Consumers can postpone a vacation or skip a trip to the mall. But they’ll keep their mobile connection to the rest of the world on, no matter what. Paying these bills in turn means that Verizon has plenty of recurring cash flows that can be used to fund dividend payments. The trade-off is relatively low growth, but it’s a fair trade-off when you also own higher growth stakes like Alphabet and Microsoft.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.