A Decade Portfolio

July 31st, 2014
in contributors

Investing Daily Article of the Week

by David Dittman, Australian Edge

A preliminary gauge of Chinese manufacturing activity reached an 18-month high in July, in a sign that Beijing’s efforts to stimulate the economy are having an impact.

The HSBC Flash Manufacturing Purchasing Managers’ Index rose to 52 in July from 50.7 in June, according to HSBC Holdings Plc. (Hong Kong: 0005, OTC: HBCYF) data partner Markit.

Follow up:

It marked the second consecutive month that the index topped the 50 mark, which separates expansion from contraction compared with the previous month.

The surprisingly strong reading is a byproduct of the Chinese government’s efforts to ease monetary policy and speed up infrastructure investment. It also signals solid momentum for the world’s second-largest economy.

China was the focus of upside surprise for UF Growth Portfolio Aggressive Holding Apple Inc. (NSDQ: AAPL) and its fiscal 2014 third-quarter report, as the innovative device-maker reported 26 percent year-over-year revenue growth in the Middle Kingdom.

Management described Chinese unit sales growth as “off the charts,” with iPhone sales up 48 percent versus a consensus estimate of 24 percent, iPad sales up 51 percent and Mac sales up 39 percent. And App Store sales, including iTunes Software and Services, almost doubled year over year.

Apple is in the process of rolling out, along with partner China Mobile Ltd. (Hong Kong: 941, NYSE: CHL), advanced network technology TD-LTE into more cities, with other operators due to introduce FDD-LTE later in 2014. This will also help delivery of services to Apple devices.

A rapid slowdown in iPad sales outside the BRICs (Brazil, Russia, India, China) is actually the driving force behind Apple’s new partnership with former fierce rival IBM Corp. (NYSE: IBM), which was announced in mid-July.

This deal will likely impact the enterprise mobility space for years to come, as it will establish Apple’s iOS as the mobile platform for business and enterprise across virtually every industry out there.

The deal will link IBM’s enterprise expertise, mobile management platform, cloud capabilities, and big data and analytics with Apple’s iPhone and iPad engineers, developers, and designers.

The partnership entails a series of 100 end-to-end solutions and apps designed to meet industry-specific needs and challenges that are designed from the ground up for iOS.

IBM cloud services will be optimized for iOS across areas such as device management, security, mobile device integration into business workflows and data analytics.

And Apple’s highly regarded support system, AppleCare, will be linked with the deep-level enterprise support knowledge that IBM has developed through decades of IT outsourcing experience as part of IBM Global Technology Services.

Apple will also gain access to IBM’s corporate customer base through packaged offerings that IBM will deliver for device activation, supply and management.

It’s another game-changing move for a company that’s made game-changing moves its lifeblood.

And it’s a major reason why Apple is one of the 10 stocks I would include in a $100,000 portfolio designed for a 10-year old child.

The inspiration for this exercise was a question I received from a participant in the June 2014 Utility Forecaster/Canadian Edge/Australian Edge monthly web chat.

Apple and the other nine members of this model, foundational portfolio are all recent “best buy” selections in UF, CE and AE. “Best buys”–the monthly Growth Spotlight and Income Spotlight in UF, the “Best Buys” in CE and the two Sector Spotlight subjects in AE–represent my top picks for new money right now.

But in a broader sense, these are companies that I as an individual investor will want to own for the long term.

Of course I have no specific knowledge of any particular subscriber’s investment objectives, risk tolerance or time horizon. These are all issues you must discuss with your financial advisor, if you have one, or consider on your own, if you’re a self-directed investor.

The thought experiment of starting with $100,000 for a 10-year-old does, however, reduce the problem a bit. We want to establish diversification, but we don’t want to be spread too thin. I have made choices based on sector and geographic diversification while also heeding certain secular growth trends as well.

There is the thought too that a 10-year-old, with a life of work and earnings ahead, can afford to bear more risk.

Well, I’d like to preserve as much of that $100,000 as possible, while certainly enjoying the benefits of compounding dividends, so that when that 10-year-old reaches 20 options such as university, graduate study, and/or travel are viable.

Or perhaps that 20-year-old, made wiser by the experience, will simply reallocate to introduce more risk, future employment prospects a little more defined at that point, and let the portfolio continue to grow.

What I have in mind, then, are 10 dividend-paying stocks suitable for long-term-focused investors across the risk-tolerance spectrum.

The one major underlying macro assumption I’ve made is that although the US Federal Reserve will eventually raise interest rates the subsequent peak will be lower than those that followed many other rate-hiking cycles in the past. This assumption is based on a lower growth long-term growth rate for the US economy relative to historical norms.

10 for 10

Near-term catalysts for Apple, including the fact that it looks “cheaper” to a broader band of investors after a seven-for-one stock split, are a new, higher-end iPhone and a refreshed iPad line, with improved processing speeds, battery life and camera quality, as well as new product rollouts such as the iWatch and the iTV. It’s also a way to play China’s emerging middle class.

Apple is no longer defined by the singular genius of Steve Jobs. But it continues to set the pace for design in the high-tech gadget space, and its horizon may actually broaden under different leadership, as Mr. Jobs wished it when he handed the baton to Tim Cook.

Verizon Communications Inc’s (NYSE: VZ) aggressive move to buy Vodafone Group Plc.’s (London: VOD, NSDQ: VOD) 45 percent stake in Verizon Wireless fortified Verizon’s already strong position in the wireless industry.

And now it’s even better placed to benefit from exploding demand for wireless data demand in the US.

NextEra Energy Inc. (NYSE: NEE) is a large, well-managed integrated utility with a robust distribution system.

It serves a growing regulated service territory under a constructive regulatory regime. It’s also modernizing its grid and developing renewable technologies. In fact NextEra is the biggest producer of renewable energy in the US.

Northeast Utilities (NYSE: NU) is New England’s largest utility system, serving more than 1.7 million electricity customers in Connecticut, Massachusetts and New Hampshire.

It boasts a strong earnings growth profile, a heavy concentration of Federal Energy Regulatory Commission-regulated earnings, a relatively light rate-case calendar and a strong financial position.

FERC transmission currently accounts for approximately 35 percent of earnings versus 5 percent to 15 percent for its peers. And a proven management team has demonstrated its ability to deal well with state and federal regulators for constructive outcomes and to deliver on targeted financial goals.

Future generation needs for ISO New England suggest that significant new transmission beyond already announced projects will be needed. Reliability looks challenged for future weather events like those seen recently, particularly with upcoming generation retirements like the Vermont Yankee nuclear facility.

American Water Works Co. Inc. (NYSE: AWK) is the largest and most geographically diversified investor-owned water and wastewater utilities in the US, with operations in 32 states and Ontario, Canada, serving approximately 15.6 million people.

American Water plans to spend $5.8 billion over the next five years, with the majority of the budget allocated to its regulated operations. Approximately $300 million will be reserved for non-regulated growth opportunities.

Management targets 7 percent to 10 percent earnings per share growth for the long term. The annualized rate of dividend growth based on the current rate versus the rate five years ago is 13.3 percent.

Chevron Corp. (NYSE: CVX) provides relatively low-risk exposure to the global energy story, with future production growth driven by new Gulf of Mexico and oil shale projects as well as the start-up in 2015 and 2016 of Australia-based liquefied natural gas (LNG) projects.

Chevron is subject to commodity-price fluctuations. Its global footprint also exposes it to political risk and civil strife in certain international locales. Heightened environmental awareness and tightening regulatory requirements pose additional threats to operations.

But Chevron has an attractive collection of liquids-weighted upstream assets, and the Super Oil is poised for robust production, margin, earnings and cash flow growth for the long term.

Enterprise Products Partners LP. (NYSE: EPD) and Plains All-American Pipeline LP. (NYSE: PAA) generate fee-based revenue tied to the continuing ramp-up of shale-based gas and oil production in the US.

Enterprise Products is the gold standard for limited partnership asset and distribution growth.

Its industry-leading integrated suite of services and dominant position in several key markets, including NGLs and the Eagle Ford Shale, provide a significant competitive advantage. It’s well positioned to win expansion opportunities.

An extensive organic growth backlog, with approximately $6.8 billion of projects under construction between 2014 and 2016, Enterprise Products should maintain solid, consistent distribution growth while retaining significant surplus distributable cash flow for reinvestment.

In fact its ample distribution coverage ratio makes it look relatively less expensive.

And management has delivered strong results throughout various cycles, demonstrating the ability to weather the tough times while thriving in the good.

Plains All American owns and operates more than 16,000 miles of crude oil and refined products pipelines and gathering systems, approximately 90 million barrels of liquids storage capacity, and a fleet of trucks and injection assets.

Its crude oil midstream footprint is unsurpassed in the US, and the management team is highly respected.

Over the next five years, management estimates oil production growth in North America will increase by 3.9 million barrels per day (bbl/d) to 15.4 million bbl/d at the end of 2018 from 11.5 million bbl/d at the end of 2013, driven by Western Canada, the Eagle Ford Shale, the Bakken Shale, the Permian Basin and several smaller plays.

And it’s on track to boost its annual distribution by 8 percent to 10 percent over the next half-decade, supported by organic growth opportunities and resurgent domestic crude output.

Australia & New Zealand Banking Group Ltd. (ASX: ANZ, OTC: ANEWF, ADR: ANZBY), although it may divest overseas assets in an effort to comply with domestic regulators’ stricter capital requirements, remains the most international of Australia’s “Four Pillars” banks.

Management’s long-term focus is on making the bank a truly Greater Asian operation. ANZ has secured a hard-to-get charter to establish retail banking operations in Mainland China, where it will benefit from an emerging middle class and its maturing financial and banking needs.

Bank of Nova Scotia (TSX: BNS, NYSE: BNS) provides broad exposure to the Canadian economy and its evolving role in the global economy. Scotiabank also has significant operations in Latin America, the Caribbean and Southeast Asia.

But its domestic franchise, like ANZ Bank’s in Australia, provides a solid foundation for long-term dividend growth, with additional upside driven by emerging market exposure.

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