The Quest for a Balanced Portfolio
Jan 9th 2012 10:37AM
Updated Jan 9th 2012 11:58AM
When I first began investing, I thought about all sorts of stocks -- everything from telecoms to apparel companies were portfolio considerations. Heck, I even considered airlines for a hot second. Now, as an energy writer, I've begun to spend an increasing amount of time immersed in one sector, and I've begun to share the worry of many investors: that my portfolio may lack balance.
In an effort to right the ship, I'm on the quest for a strategy to keep my portfolio balanced.
All aboard the Dividend Express
An easy way for investors to diverge from their particular comfort sector is to take an investing concept that works for them and work backward toward a company. Dividend investing is a great example of this. It is easy to run screens, or even Google searches, to find the top dividend-paying companies.
Though a 2.5% yield is not necessarily anything to write home about, I really like McCormick (NYSE: MKC ) in this case. The spice and seasoning giant has a firm grip on its industry and is experiencing solid growth, at home and abroad, through brand acquisition. The company has an 87-year dividend history and raised its dividend by 11% at the end of November.
Let's take a look at McCormick's dividend growth over the last five years.
This is a dividend stock that may not blow investors away, but performs consistently and is committed to dividend growth.
Ubiquity is the spice of life
Another approach is to pick out an investment that is everywhere, all the time -- something that people need to survive. For some investors, that company may be a water utility like American Water Works. For the more cynical among us, that investment is Starbucks (Nasdaq: SBUX ) .
There's a good chance that if you drink coffee, you've had a cup of Starbucks. I'll be the first to admit, it's not mind-blowing; I've had much better coffee in many other places. But Starbucks has locations everywhere, and for some reason, no matter the day, no matter the time, there are people in the stores buying coffee. And tea. And juice.
With more than 10,000 Starbucks stores stateside, bearish investors wonder if there is much growth potential left in the stock, but bulls look to the recent $30 million acquisition of Evolution Fresh as a sign of things to come. Starbucks, they intimate, could be the next PepsiCo. That may very well be where the company is headed, removing the word "coffee" from its logo to prevent pigeon-holing.
For now, though, my confidence in the company stems from the customers I see routinely lined up at the counter around the clock, waiting for their cup o' joe.
Following the leader
You can never say too much about management. A leader's vision and ability to execute that vision is arguably the most important factor in making or breaking a company.
It isn't always easy to measure something as intangible as "management ability." Motley Fool co-founder and CEO Tom Gardner will point you toward the insider ownership metric: Are the company's leaders invested in their work? Fool Matt Koppenheffer illustrates his point well, recently showing how lack of ownership might have been a red flag in the MF Global collapse.
Others will tell you that it's about tenure -- that a leader should invest time, as well as money, into his or her company, and that's the metric you should focus on. Founder-led companies, or executives who have spent decades climbing the corporate ladder -- those are the executives investors should covet.
But I'm looking for something more. I'm looking for leaders like Alan Mulally.
Ford (NYSE: F ) CEO Alan Mulally did not spend the better part of his career at Ford; he grew up at Boeing. He owns shares, but is nowhere near the top shareholder. And yet, he is credited with avoiding a government bailout, turning Ford around, and positioning the company well for the future.
The most significant impact that Mulally has had at Ford, in this Fool's opinion, has been to emphasize the importance of communication at Ford.
When he joined Ford in 2006, Mulally really stressed communication and transparency. Weekly meetings expanded to include representatives from every functional area in the company, including previously unrepresented areas such as HR and IT. This move effectively exposed executives to all aspects of the company.
As a result, new problems were discovered and fixed, new plans were developed, new efficiencies were exploited, and, perhaps most important, everyone was on the same page.
Before Mulally's arrival, Ford acknowledged that in-house executives were not as well-rounded or prepared to lead the company. Now, Chairman Bill Ford has gone on record saying that Mulally's successor will probably come from inside Ford.
As I continue to grow my portfolio, I plan to keep three things in mind to generate ideas and maintain balance: dividends, ubiquity, and management. Every investor has a different approach, and I imagine that mine will continue to evolve over time as well.
For a nice list of new stock ideas, check out the Motley Fool's special free report, "Secure Your Future with 11 Rock-Solid Dividend Stocks."