Focus on the Core

Bruce Lee, one of the greatest martial artists of all time, used to believe that the abdominal muscles were the key muscle group to develop, since virtually every movement involved their use. A martial artist with a weak core had no business sparring, he reasoned. Similar to investing, the Core Holdings of a portfolio provide the foundation and structural support needed for victory.

When times are good and the economy is surging, any geek off the street can pick a stock at random and succeed. However, when the going gets rough, that’s when you will thank your lucky stars that you invested in sound companies.

When picking Core Holdings, it can be helpful to analyze past data. Although past performances will not predict future successes, until we find a way to build an anti-causal system, this is the best we can do. In particular, confidence can be gained by specifically analyzing the rough times (depressions, recessions, financial crises, etc), and observing which companies not only survived the storms, but continued to thrive throughout them.

For my own personal criteria, I am most keen on investing in companies that have a proven track record of:

  • Continuing to grow the dividend in spite of tough economic times
  • Strong balance sheet with minimal debt-to-equity (this is extremely important as free cash flow ensures the dividend can be maintained even if earnings miss from time to time and the payout ratio swells)
  • Offer products and services that are always in high demand, regardless of the state of the economy
  • Have a strong presence in the global marketplace, not just the local economy
  • Are leaders that dominate their respective markets (either due to leading edge technology, strong barriers preventing others from entry, or simply due to strong marketing which has created a household name)

When searching for these stellar companies, a good place to start is to look at the Dividend Aristocrats list. To qualify as an aristocrat, a company must have raised its dividend for a minimum 25 consecutive years.

Here is a link listing the 2012 Dividend Aristocrats:
http://investorjunkie.com/3974/2012-dividend-aristocrats/

Choosing the core is not an exact science, but my general rule of thumb is to pick 5 or 6. Each holding should represent between 3% to 10% of the total portfolio’s value.

These are the companies I have qualified to be Core Holdings in my portfolio*:

  • Chevron (CVX)
  • Johnson and Johnson (JNJ)
  • Procter and Gamble (PG)
  • Coca Cola (KO)
  • McDonald’s (MCD)

*At this time of writing, I have only initiated positions with: CVX, PG, KO

I couldn’t identify a clear consensus pick for the #6 position (KMI?, EPD?), so will go with a Starting 5 for now.

Here is data highlighting the dividend growth starting from January 2, 2002 up to October 1, 2012. We assume an initial investment of $1000 for each holding, for a total of $5000.

For each company, you’ll notice the dividend was not cut, and in fact, increased every year during the Great Recession of 2008-2009.

CVX Data: Dividend Growth Rate (2011) = 9.2%

JNJ Data: Dividend Growth Rate (2011) = 12.3%

PG Data: Dividend Growth Rate (2011) = 11.22%

*Excludes June 2002 special dividend due to Crisco/Jif spin-off

KO Data: Dividend Growth Rate (2011) = 9.96%

MCD Data: Dividend Growth Rate (2011) = 30.22%

The average dividend growth rate for the Core Holdings is 14.57%

The total payout in dividends for each $1000 investment are as follows:

CVX: $538.89
JNJ: $290.29
PG: $378.86
KO: $310.23
MCD: $563.23

Total: $2081.50

We would have received 42% of our initial $5000 investment back in dividend payouts over the 10 years.

The value of the shares is $10,623.95

The total value is $12,705.45

These type of gains might not seem too impressive, or astronomical to those who like to trade and play with options (especially with volatile tech stocks). However, I’ll gladly take these results and not have to deal with the stress and anxiety associated with trading.

I’ll also take comfort in knowing that I am investing in large-cap industry leaders who have proven that they can consistently increase earnings + dividend payouts. Even better, each one of these companies has proven that they can withstand even the worst economic crashes, and still bounce back stronger than ever. How’s that for peace of mind?

What companies make up your Core? Do you believe in designing around a Core, or do you prefer to have an evenly distributed allocation across all holdings?

 

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Portfolio Update: New Addition (CVX; December 15, 2014)Part 2: The Secret Recipe for Retiring Early (Using the Stock Market)Part 1: The Secret Ingredients for Retiring Early (Using the Stock Market)FI FighterDividend Mantra Recent comment authors
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Compounding Income
Guest

My core: KO, PEP, PG, PM, MCD, JNJ, ABT, CVX

I intend to have core holdings be the larger positions in a portfolio of 30-35 (maybe even 40 one day) stocks. I’d like to add to some of these such as KO and CVX, but I’ll have to wait till I can get better value. ABT is doing a spinoff, I’ll wait on that as well. The tricky part is finding good entry prices, everyone else knows about these companies too. I don’t know if they will maintain the super high dividend growth rates like they’ve had in the past, but I’m happy with 6-7% raises 🙂

If I had to pick 6 I’d go: MCD, KO, PM, JNJ, ABT, CVX Pretty much the same as you!

Dividend Growth Machine
Guest

That’s a nice selection of core holdings; of course, I may be biased because I own all 5 stocks! 🙂

JC @ PassiveIncomePursuit
Guest

I’m working on building my core up right now. Those are definitely some great companies. I currently own 3 of your 5, although my PG position is smaller than where I would like it to be. I’m hoping to be able to get into CVX, although energy does currently make up and outsized proportion of my portfolio.

Dividend Mantra
Guest

“The total payout in dividends for an initial $1000 investment is $2081.50. We have already received double our initial investment back in a span of 10 years.”

Is that right, FI Fighter? As I understand it you were using an initial investment of $5k, not $1k.

I also focus on the core now, but at the same time when my portfolio is all settled and I’m using the dividend income for daily expenses, I’m going to try to have a diversified and fairly equal weighted portfolio. For instance, my core holdings might make up 4-5% of my portfolio when I’m finished while smaller holdings might make up 2-3% at that time. We’ll see.

I currently like PM, ABT, JNJ, PEP and CVX as my largest holdings.

Best wishes!

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[…] dividend, one that never gets cut, and only continues to grow each year. These gems make up the Core Holdings in our portfolio. But because nothing in life is certain, outside of death and taxes, we take a Buy […]

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[…] a quality company like Coca-Cola (KO), or Johnson and Johnson (JNJ). Both KO and JNJ belong in my Core Holdings, but at this moment in time, I own exactly zero shares of […]

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[…] just like I was doing in 2012, I’m going to focus on the core with most of my new investments. Sure, I’ll probably still pick up some shares of Tesla […]

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