A little over a year ago, I published what is still my most read Seeking Alpha article of all-time: My Top 10 Stocks For The Next 10 Years. This article is still my most viewed Seeking Alpha article of all-time.
History shows that the average retail investor generates underwhelming returns. As you can see on the chart below (admittedly, it's a little out-dated, though I doubt the trend has changed much in the last 5 years or so), if retail investors were an asset class, you certainly wouldn’t want to invest in them. This underperformance is due to the irrational behavior that many retail investors demonstrate in the market. Letting fear and greed dictate investing decisions is not a good plan of action. Succumbing to fear and greed is oftentimes a symptom of short-term thinking. I was so pleased that this title gained such traction amongst readers because I worry that too many individuals are focused on the short-term when it comes to their investments. Its popularity renewed my faith in the retail investor a bit (or at least, the average reader here at Seeking Alpha). With this in mind, I’ve been waiting to re-visit this piece a year later to track the results of my picks and continue the discussion of buying and holding high quality stocks over the long-term.
Source: Business Insider
One of the biggest mistakes that I see investors making on a regular basis is giving into either fear, or greed, or both. Ignoring fundamentals while chasing momentum because of the fear of missing out is a common issue. And, the fear of missing out can quickly turn into fear of losing more. In other words, emotional trading oftentimes results in buying high and selling low. This is the exact opposite of what common sense tells us.
I think it’s always best to buy high quality assets when they’re cheap, yet I understand that evaluating stocks is a sophisticated process that many individual investors don’t feel incredibly comfortable with. It takes time to develop a system of stock evaluation and portfolio management that for you. I think that portfolio management is an art, rather than a science, and a self-directed investor’s success will likely come down to their ability to understand their own strengths and weaknesses and formulate an individualized plan that capitalizes on strengths and minimizes the deleterious effects of weaknesses. Investing can get quite sophisticated, but in the meantime, there is a relatively simple plan that has produced solid results over the long-term that all investors can adhere to: buying & holding high quality stocks.
One of thing things I hoped to prove when writing my original top-10 piece was that simply buying and holding onto high quality stocks over the long-term can result in out-performance. Investors who don’t have a disciplined, long-term plan can fall prey to fear and end up selling into isolated, short-term weakness. The combination of buying high and selling low is a sure-fire was to generate subpar returns over the long-term and this is why we see the retail investor so far towards the right hand side of that chart above.
Maintaining a long-term mindset helps to avoid such pitfalls. One year isn’t exactly a long-term holding period, though for the sake of reviewing this piece, it’s all that I have to work with. I do acknowledge that a lot can happen in a year’s time though. This is especially the case in the fast moving world that we live in. While I still think it’s best to ignore most of the noise that tends to circulate around high quality names, instead trusting in their underlying fundamentals, their top-notch leadership, and ultimately, the winning cultures that have been established and built over the years, I’m still happy to take a look at what I said about each of these 10 holdings a year ago to see if anything has changed.
Apple (AAPL)
Apple closed the trading day on 8/27 at $217.94. Today, AAPL shares trade for $213.14, representing a loss of 2.2%. The S&P 500 is up 2.3% since 8/27/18, meaning that AAPL’s negative performance represents relatively underperformance.
Since August of 2018, the SPY has paid $5.42 in dividends. When dividends are factored into total return, the SPY’s gains rise to 4.2%. Apple shares have generated $3.00 in dividends since August of 2018. When dividends are factored into AAPL’s total return, the company’s losses narrow to 0.8%. So, as you can see, over the last 12 months or so, AAPL shares have underperformed the market at 5%.
Here’s what I said about Apple last August:
“Up first, we have Apple. This was an easy stock to include. It’s my largest position by far, because of several reasons. First and foremost, smart phones have essentially become the Coca-Cola’s of the present age. What I mean is every has one and feels like they couldn’t live without it. The iPhone is the strongest brand within the smart phone space. Apple has the highest hardware margins and I don’t expect this to change. What’s more, Apple is diversifying its revenue streams with services, further monetizing its massive worldwide active device count. But, what I like most about Apple isn’t its operations in the present, but its massive cash flows and the flexibility that they give the company moving forward. The way I see it, there isn’t another large cap, dividend growth company in the market can has the capability to re-invent itself in a moment of need, like Apple.”
I stand by that general message. Although AAPL’s stock price has underperformed, the company remains a leader in the hardware space and has a software/services segment that continues to grow at an impressive pace. Over the last year or so, AAPL has also established itself as the world leader in wearable technology. The Apple Watch is now the most popular watch in the world and the company’s ear buds are also helping to deliver non-iPhone specific sales. AAPL’s dividend growth slowed a bit in 2019, though the company continues to return enormous amounts of money to shareholders via its stock buyback program. Management has stated that it hopes to go cash neutral on the balance sheet, which sort of negates the idea that the company could simply use its massive cash hoard to make a big M&A splash if it needed to re-invent itself. However, AAPL has generated free cash flows of nearly $60b during the trailing twelve months, so M&A shouldn’t be an issue one way or the other. Those ~$60b of cash flows basically speak for themselves. That’s why AAPL remains my largest individual positions. It’s why I continue to be so bullish on AAPL shares. And, it’s why AAPL remains one of my favorite long-term stock picks.
Microsoft (MSFT)
Microsoft closed 8/27/18 at $109.60. Today, share are trading for $135.74. That represents gains of ~23.8%, crushing the SPY’s ~2.3% capital gains. Since August of 2018, MSFT has paid $1.84. With dividends factored into total returns, we see MSFT posting gains of ~25.5%, well ahead of the SPY’s total returns of 4.2% over the same period of time.
Here’s what I said about Microsoft last August:
“While we’re on the subject of cash flows/cash hoard, why not transition to Microsoft. With Apple saying that it plans to go cash neutral on its balance sheet, that leaves Microsoft as the next likely candidate to take the throne as the most cash rich company in the world. MSFT doesn’t have the ~$270b of cash on hand that AAPL does, it did have a very impressive $133.7b of cash, cash equivalents, and short-term investments at the end of the last quarter. This cash gives Microsoft the same flexibility to grow moving forward that I discussed with Apple. Microsoft is also a leader in the fast growing cloud space, the video gaming space, social media, and the A.I. market. What’s more, it still has significant legacy cash flow coming in from its software division. Under CEO Satya Nadella, Microsoft has become a well diversified technology powerhouse with growth engines left and right. What’s not to like?”
Microsoft is a perfect example of how simply buying and holding a high quality company can generate massive wealth. Since my original piece, MSFT has become the largest company in the world in terms of market cap. MSFT was expensive last August when I added it to this list. Today, I think it’s even more expensive. Yet, Nadella’s vision is so strong and the company continues to build out leading platforms in the cloud space which the market is willing to pay high premium for because of the reoccurring/high margin cash flows that these businesses generate. MSFT continues to have one of, if not the absolute best, balance sheets in the world. The company has generated more than $38b of free cash flows during the trailing twelve months. MSFT’s margins continue to rise. Debt was reduced during fiscal 2019. And, MSFT management continues to pay a generous, growing dividend as well as significantly reduce its outstanding share count via the buyback program. Other than the high valuation, there’s very little here not to like. MSFT remains a core position in my personal portfolio and I think it’s a great long-term hold.
Alphabet (GOOGL)
Alphabet was trading for $1245.86 on 8/27/18. Today, shares are trading for $1206.23. Alphabet doesn’t pay a dividend, so we don’t have to factor that into the equation. This represents total returns of negative 3.2%. This represents slight underperformance relative to the SPY’s 4.2% total return.
Here’s what I said about Alphabet last August:
“Sticking with the Silicon Valley powerhouse theme, let’s go to Alphabet. GOOGL is the only company on this list that doesn’t pay a dividend. Alphabet is known for its Google search engine. The Google family of offerings still generates ~90% of Alphabet’s revenues, which is a bit concerning in terms of the diversification of its revenue stream, but GOOGL isn’t just a digital ad company. It’s become a leader in the cloud space. Instead of paying a dividend, GOOGL has invested heavily in more speculative bets, several of which could be paying off handsomely in the near future. GOOGL’s Waymo division, for instance, is thought of as a leader in the autonomous vehicle space. GOOGL’s software makes it a leader in the automation/A.I. space in general, which is exactly where I want to be as an investor looking out over the long-term horizon. GOOGL is also doing interesting work in other significant markets, such as healthcare. I also view it as a potential leader in digital security. When it comes to technology, GOOGL appears to have its hands in a wide variety of cookie jars and when it comes to long-term success, this is exactly what I like to see.”
While I still remain quite bullish on GOOGL’s diversified growth prospects, it’s true that the company has had a pretty tumultuous trailing twelve months. When I wrote my article last year, this name wasn’t really in the political crosshairs. Today that isn’t the case. Alphabet is being looked into for anti-trust issues/violations in the U.S. and abroad. Big-tech has been under the regulatory Microscope for a little while now and I don’t think these issues are going to disappear for GOOGL in the short-term. However, I’m content to ignore that noise and continue to focus on the company’s massive profitability and continued double digit growth prospects. GOOGL shares were trading for ~30x earnings when I originally wrote my top-10 list and today, that earnings multiple has fallen to ~25x on a ttm basis. On a forward basis, using current analyst consensus estimates, GOOGL shares are even cheaper. They’re currently trading for ~22x 2020 EPS estimates. It’s rare to find a company with the growth prospects that Alphabet offers trading for such a low multiple. With this in mind, I think the underlying fundamentals and the low valuation will eventually trump the regulatory concerns and result in strong long-term growth.
NVIDIA (NVDA)
On August 27th, 2018, NVDA shares were trading for $275.90. Today, they’re just $182.90, representing a loss of approximately 33%. NVDA pays a small dividend and the $0.64/share that shareholders have received since August of 2018 results in a total return of -33.5%. Obviously this is much worse than the 4.2% gains that the SPY has posted during the same period of time.
Here’s what I said about NVIDIA last August:
“And finally, we come to the last pure play technology company on the list, NVIDIA. Right now, NVDA is a leader in the fast growing video gaming industry, but I think that’s just the start. NVDA’s CPU chips have found a home in data centers worldwide, which is also an industry with secular growth behind it. Lastly, and probably most importantly to my long-term bullish thesis here, is NVDA’s leadership in the automation/driverless car market. I suspect that the transition from driven cars to driverless vehicles will be one of the greatest transformative developments for society in the decade(s) to come and NVDA seems poised to profit from this shift. NVDA is probably the expensive stock on this list in terms of valuation (I strongly considered including Amazon (AMZN) as well, but it’s valuation is simply too speculative at this point and while I’m long the stock personally, I think it carries too much risk to include in a top-10 list), but I still think the stock has massive upside for those willing to stomach the share price volatility.”
NVIDIA has certainly had a tough go of it during the last 12 months. The stock’s growth has slowed on the top and bottom lines and when this happens to a market darling type stock, you’re going to see significant multiple compression. Furthermore, the crypto-craze appears to be over with, or at least, mining isn’t happening at nearly the same extent as it was a year ago, and this has hurt some of the sentiment surrounding NVDA’s stock. Competitors are strong in the gaming, A.I., and data center spaces that represent growth for this company. In short, I still think that NVDA remains an exciting growth name, but the stock was priced to near perfection a year ago and obviously the operations didn’t meet expectations. I noted the stock’s expensive valuation when I added it to the list. While the pace of the slowdown did come as a surprise to me, I’m not surprised to see outsized volatility here. NVDA posted strong triple digits returns during the 2016-2017 years when it was the top stock on the NASDAQ and obviously it couldn’t have maintained that level of dominance forever. Long-term, I think NVDA shareholders will be just fine. I did trim my position a bit during the weakness because of the deteriorating fundamentals and the slowing dividend growth. When dividend growth fell into the single digits last year I decided to lock in some hefty profits and maintain a smaller, speculative position moving forward (I dedicated the funds from the sale to Alphabet, which was cheaper and offered more reliable growth prospects, in my opinion). However, when I think about what the world is going to look like in another 9 years, I imagine that automation, gaming (especially virtual reality), A.I. driven by 5G infrastructure are all going to represent much larger markets than they do today and this should benefit NVDA shares. This is why I didn’t sell out entirely (although NVDA no longer meets my dividend growth expectations). Sometimes, growth markets are so enticing that I can’t help but desire a bit of exposure due to the massive upside I see.
Boeing (BA)
On August 27th, 2018 Boeing shares were trading for $353.74. Today, shares are trading for $369.50. This represents capital gains of 4.45%. Boeing has paid $7.87 of dividends during the trailing twelve months. With dividends factored into the equation, we see that Boeing generated a total return of 6.68%, slightly higher than the 4.2% the SPY generated over the same period of time.
Here’s what I said about Boeing last August:
“I suppose that you could say that Boeing is a technology company (BA is building rockets to put man on Mars, for goodness sake); however, I’m going to continue to view them as an industrial/transportation company. With that being said, the globalization/urbanization macro trends that Boeing benefits from might be just as strong as the A.I./automation trends that drove a lot of my tech picks. The world has seemingly insatiable demand for airplanes. Since Boeing operates as a part of a duopoly in this field, this bodes well for them. This company has a backlog of nearly $500b. Sure, there is speculation of Chinese competition entering the market, but I think that’s likely a decade or so away, at least, from really putting any major pressure on Boeing. In the meantime, BA will continue to post massive cash flows and return large chunks of change to its investors. What’s more, BA has recently focused on improving its margins via a service segment that continues to post nice growth. This should not only continue to drive demands for its products, but also increase the switching costs for customers. Being a cyclical company, Boeing does run the risk of dividend freezes, or even cuts, in bear markets. With that said, I don’t worry about the income that I receive from Boeing. This company has posted a dividend growth CAGR of ~14% dating back to the year 2000. That works well for me.”
I think the fact that Boeing has generated alpha relative to the SPY (or even, a positive return) over the last year is amazing considering the problems that this company has had to fight through. Just today, BA announced orders and deliveries for the year thus far and they are well off the results from a year ago. The 737 Max issues have been a major headwind for the company in the short-term, yet the market continues to show confidence in BA’s ability to bounce back. The company still has a tremendous backlog and the belief is that as soon as the FAA and other regulators worldwide approve the 737 Max resolutions deliveries will begin to pick right back up. In short, I think Boeing is fairly unique in its ability to weather this storm. The wide moat and high barriers to entry into the aerospace market continue to support the stock. Sales and earnings are down significant in 2019, but analysts are calling for massive growth in 2020. Boeing is one of my largest positions and I haven’t considered selling a share during this crisis. It’s my focus on the long-term that has allowed me to sleep well at night holding onto a large Boeing position throughout the volatility that the stock has experienced in recent months. I’m up triple digits on my Boeing stake (even after the 2019 weakness) and I don’t think that compounding process is even close to being over with. BA remains the crown jewel of American manufacturing and I whole heartedly expect shares to be significantly higher 9 years from now (or heck, even 12 months from now) than they are today.
Walt Disney (DIS)
Disney shares closed 8/27/18 at $112.33. Today, they’re trading at $135.79. This represents capital gains of 20.88%. Disney has paid $1.76/share worth of dividends since then, pushing its total return up to 22.45%, well above the 4.2% that the SPY has generated over the same period of time.
Here’s what I said about Disney last August:
“We’re moving away from the tech trades, but DIS still benefits from much of the same tailwinds. As the undisputed king of content (especially once the Fox deal closes), I think Disney is really going to benefit from the ongoing automation trend. As automation increases the efficiency of human society, free time should be on the rise. That will increase the demand for entertainment and experiential retail. Disney offers both in spades. I picked DIS for this list instead of Netflix (NFLX) because of its more diversified business model, its long history of in-house content production, its massive content library, and its much cheaper valuation. Although Disney had been pretty late to the game in terms of over the top streaming offerings, I think it’s good that they’re finally moving strongly into the space with their ESPN app and the OTT services expected to launch over the next 12-18 months. It’s also worth mentioning that Disney will likely have a large stake in Hulu after the Fox deal closes. It might be a bumpy ride as the traditional media landscape continues to evolve into one that primarily revolves around streaming, but long-term, I really like Disney.”
After years of underperformance, Disney shares have really popped in 2019. This is primarily due to the company finally solidifying its OTT strategy and entering into the streaming wars. Disney has been one of my largest individual holdings for awhile now. I accumulated a lot of shares during the cord-cutting weakness that the stock experienced in recent years. So, I’m certainly glad to see the 2019 rebound. The Disney+ streaming service is set to launch later this year and I think this will be a major growth engine for the stock over the next decade or two. Disney’s brand remains incredibly strong on a global basis. 2019 is a record year for the company at the box office and with such strong franchises driving growth, I wouldn’t be surprised if the companies continue to break its own record several times between now and 2028. Its theme parks’ results remain strong. In short, this company is able to monetize its IP better than any other name in the entertainment space. In a world where content is king due to the ever increasing efficiency of society putting a premium on entertainment to fill up newly created free time, why not own the king of content? Disney has posted strong outperformance during the past year and I wholeheartedly expect that trend to continue over the next decade (and more!).
Nike (NKE)
On 8/27/18, NKE shares were trading for $82.50. Today, they’re trading for $86.83. This represents capital gains of 5.2%. Nike has paid shareholders $0.86 worth of dividends per share since then. When these dividends are factored into total returns, we see that Nike has generated growth of 6.3%, beating the SPY’s 4.2%.
Here’s what I said about Nike last August:
“Technology has been a trend throughout this list. I don’t really consider Nike to be a technology company, though I do think they are one of the world’s leading material science firms. Nike’s innovative fabrics have evolved over time to enhance both performance and comfort. Looking ahead long-term, I suspect that the world will have a more intense focus on enhanced productivity and Nike will benefit from this. We’ve already seen times changing with regard to performance/comfort being prioritized over traditional dress wear that might not have been as practical. Worldwide, Nike’s brand name is strong, representing quality, and even wealth, to a certain extent. In a world where demand name branded goods is declining, I think Nike’s swoosh remains strong. Macro trends aside, I also think that Nike is setting itself up to be a dividend growth superstar over the coming decades. The company has an established history of strong, double digit increases. Since 2002, Nike’s dividend growth CAGR is a very impressive 16.6%. Even after all of this dividend growth, NKE’s payout ratio is in the 30% range. This company has plenty of room to grow its dividend and I fully expect it to be a dividend aristocrat in the future.”
Nike has been in the news a lot over the past year or so due to social/political issues. This turns certain investors off of the stock, but ultimately, I think this is a very strong company capable of weathering short-term storms like this. Even considering some of the negative news headlines, Nike shares still outperformed the broader market. Nike continues to be my favorite stock in the footwear/apparel space. I actually view the stock as a leading material science play because of the technology involved in its wears. The company has not disappointed when it comes to operational performance, nor dividend related metrics. I continue to believe that Nike will be a great long-term hold (especially for those interested in the company’s strong, reliably growing dividend). Simply put, this isn’t a stock that I pay much attention to. Even when it’s in the news, I’m able to sleep well, knowing that it’s a best-in-class name with long-term growth potential. Today, the valuation is a bit high, but like so many other stocks on this list, it nearly always is. Regardless, I suspect that Nike shares will be much higher in a decade than they are today and that’s the type of confident sentiment you’re looking for when picking stocks to buy and hold.
Starbucks (SBUX)
Starbucks closed the day on 8/27/18 at $52.97. Today, shares trade for $90.35. This represents capital gains of 70.5%. Starbucks has paid $1.44 worth of dividends during the trailing twelve months. When these dividends are factored into the total return equation, SBUX’s gains rise to 73.2%, absolutely crushing the 4.2% total returns that the S&P 500 has generated during the last 12 months.
Here’s what I said about Starbucks last August:
“Starbucks is my consumer staple-esque name on this list. I realize that SBUX is more of a consumer discretionary company, but in this health conscious world, I believe that coffee will continue to be more popular than Soda as the go-to caffeinated beverage of the energy deprived individual. I’m a big fan of investing in companies that legally sell addictive substances. Demand for tobacco based products appears to be falling, but that isn’t the case for caffeine. I view SBUX as the McDonald’s (MCD) of the millennial generation. I think this is a dividend aristocrat in the making. Since initiating its dividend its dividend, SBUX has a strong history of double digit annual growth. The company recently increased its dividend by 20%. Although SBUX has become known for 20%+ dividend growth, I wouldn’t be surprised to see its DGR slow in the relatively near future. This is bound to happen as the company matures. However, right now SBUX yields close to 3% and even if it only averages 10% dividend growth annually over the next decade (which I believe to be a conservative estimate), we’re still talking about some wonderful compounding going on here.”
Simply put, Starbuck’s returns over the past year baffle me. I actually recently took profits, trimming a small portion of my overweight position at ~$95/share because the stock’s valuation has run up so quickly. But, this portfolio is about long-term buy and holds and while I think the short-term performance and high quality added risk to my portfolio in the short-term, I continue to hold a very large stake in SBUX because of the reliable growth and strong shareholder returns that this name generates. Management has spent billions buying back shares over the last year. This has helped to bolster the stock’s bottom-line. Analysts are expecting to see double digit EPS growth in 2020 and 2021 as well though, so the “financial engineering” that we’ve seen under new management isn’t expected to be a short-term phenomenon. SBUX’s sales comps have been strong in recent quarters. The company continues to expand its global store count. And, the strength of this brand is as strong as ever in the consumer discretionary space. Heck, SBUX could produce meager returns over the next 9 years and after the first year’s 73% results, long-term investor would likely still be looking at alpha. This stock was the first-year all-star of this list and I think long-term investors should still be feeling confident about their positions.
Visa (V)
Visa shares closed 8/27/18 at $145.40. Today, shares are trading for $176.35. This represents capital gains of 21.2% over the past year or so. Visa has paid dividends of $1.00 during the trailing twelve months, pushing its total return up to 21.97%, well above the 4.2% that the SPY has generated during the same period of time.
Here’s what I said about Visa last August:
“When I was thinking about putting this list together, I wanted to stay fairly diversified. I knew I wanted a financial stock on the list and ended up having a hard time choosing between J.P. Morgan (JPM), which is my favorite big bank, offers a cheap valuation, and a relatively high dividend yield, Berkshire Hathaway (BRK.B), which essentially speaks for itself as a highly diversified holdings company with incredibly strong cash flows and leadership, and the two main credit card companies, Visa and MasterCard (MA). I crossed J.P. Morgan off of the list because while I think it will benefit from rising rates and lower regulation in the short-term, I still worry about how it will fare during the next recession. I crossed Berkshire off of the list because I’m not super bullish on the insurance industry moving forward (I suspect that climate change will continue to cause problems for the those companies), because it doesn’t pay a dividend, and although this is a bit morbid to say this, because Warren Buffett isn’t getting any younger and I suspect that at some point during the next decade he will no longer be calling the shots for this company and I think that could cause Berkshire to lose some of its luster amongst investors. This left me with the two credit card names, which essentially act as toll booths in the global digital payment market. I think both names are great and it’s difficult to choose between the two operationally. I think both names will be dividend aristocrats one day. However, I decided to make my decision based on the current valuation, which favored Visa as the cheaper option of the two.”
Looking back, I’m certainly happy that I went with V instead of one of the big banks. Valuation was a concern of mine when putting this list together, but at the end of the day, this is one of the few stocks in the market that I’d be willing to buy and hold, at just about any valuation, because it is extremely difficult to find this sort of fundamental growth elsewhere. It’s almost crazy to say this, but Visa’s strong, double digit growth essentially meets my expectations. Visa continues to produce strong, double digit bottom-line growth like clockwork. The stock’s valuation is quite high, yet it just about always is. To me, this is a stock to accumulate slowly and regularly over time. Visa has generated tremendous wealth for its shareholders since its IPO in 2008 and I don’t think that trend is anywhere close to ending.
W.P. Carey (WPC)
And last, but certainly not least, we arrive at W.P. Carey. This REIT was trading for $65.82. Today, WPC shares are trading for $87.38, representing capital gains of 32.7%. WPC has paid $4.12 worth of dividends during the trailing twelve months. When the dividends are factored into total returns, we see that WPC generated gains of 39%, well above the 4.2% that the SPY generated during the same period of time.
Here’s what I said about W.P. Carey last August:
“When I put together lists like this, I always like to include a high yielder or two. In the past, AT&T (T) has usually been my go-to name in the high yielding space; however, since I already included Disney on this list, I decided to go with my favorite REIT, W.P. Carey, which sports a slightly higher yield than AT&T, at 6.2%. I like WPC so much because of its well diversified portfolio. Unlike other well known triple net REITs, WPC isn’t constrained by geological limits or the industries of its tenet base. WPC is a global REIT that owns properties spanning a variety of industries, from retail, to industrial, to office, to warehouse, and self storage. I nearly went with Brookfield Infrastructure Partners (BIP) in the high yielding slot because of that company’s diversified revenue streams, but WPC’s yield is much higher than BIP’s ~4.5%. BIP probably offers better dividend growth prospects than WPC, but that’s okay. With this list, I’ll get my dividend growth elsewhere. In my opinion, WPC offers a safe, stable 6%+ yield, with low single digit annual dividend growth prospects, with attractive total return prospects to boot as management focuses more on becoming a pure play triple net REIT, which should increase the quality of its income, garnering it a better credit profile, and eventually, spurring multiple expansion to levels on par with the other large cap triple net players in the space.”
When I added WPC to this list, I surely didn’t expect it to generate some of the best short-term returns. WPC is the largest REIT in my personal portfolio because of its high quality portfolio of assets and their diversified nature from an industry and geographical standpoint. Furthermore, because of its corporate structure, WPC has been much cheaper than other well known triple-net peers, such as Realty Income (O) and National Retail Properties (NNN). Management is changing that structure which has caused WPC’s multiple to expand over the last year or so. This restructuring, more than anything, is the reason for WPC’s strong short-term returns. I certainly don’t expect to see ~40% returns here on an annual basis, but I do think that WPC will continue to pay a strong, reliable yield over the next decade. My expectation here is to receive high single digit/low double digit total returns over the long-term. That might not seem exciting to some, but slow and steady returns like that will build immense wealth for those who are patient. And, as the trailing twelve months have shown, even high yielders have the potential to post dramatic out-performance. Historically, REITs are one of the top performing assets classes in the world and I think not having exposure to real estate in any long-term portfolio would be a mistake.
Conclusion
Overall, the average gain posted by these 10 holdings was 15.62%, which soundly beats the SPY’s 4.2% returns during the first year of this experiment.
Things weren’t looking so great towards the top of the list with the big-tech names that were negative, but the consumer oriented names and the lone REIT really pulled through in the end. I wouldn’t be surprised to see things change in future years. You’ll never hear me say that I can predict the future, but I am sure about one thing: tech’s time in the sun is not over with. Technology offers the best long-term growth prospects of any sector in the market and I feel confident that high quality tech names like Alphabet, Apple, and NVIDIA will post solid long-term results.
A common criticism of this list when I first produced it was that I was essentially just picking large cap, blue chip names, and therefore, I should expect nothing more than SPY-like returns. I hear this sort of critique all of the time when I write about my personal portfolio as well, because while it’s bigger than just 10-equal weighted holdings, it is also comprised of large cap, blue chip names. But, my personal portfolio has generated outperformance relative to the SPY over the years and this portfolio has as well.
This just goes to show that picking and choosing the highest quality names pays dividends (literally and figuratively). To me, this makes sense. The SPY is made up of 500 names, so obviously they all can’t be of the same quality as these best-in-breed picks are. I think diversification is great, but I think picking and choosing quality assets is more important.
I’m not here to say that these 10 names will continue to post double digit alpha on an annual basis, but I do feel confident that they will outperform the broader market over the long-term. Only time will tell of course, but if year-one is any indication, this list is full of winners!
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