MasterCard Makes Shareholders Richer While New Models Drive Ford Higher

A three-year-long experiment intent on showing that life's most basic needs can result in market-beating portfolio gains, hefty dividend income, and a good night's sleep!

May 12, 2014 at 6:05PM

Last May, I announced my intention to create a portfolio that embodied life's basic needs. To that end, over a period of 10 weeks, I detailed 10 diverse companies that I think will outperform the broad-based S&P 500 over a three-year period because of their ability to outperform in both bull markets and bear markets, as well as their incredible pricing power in nearly any economic environment.

If you'd like a closer look at my reasoning behind each selection, just click on any, or all, of the following portfolio components:

Let's look at how our portfolio of basic-needs stocks has fared since we began this experiment.

Company

Cost Basis

Shares

Total Value

Return

Waste Management 

$42.60

23.24

$1,020.70

3.1%

Intel

$23.22

42.64

$1,121.43

13.3%

NextEra Energy 

$87.94

11.26

$1,091.32

10.2%

MasterCard

$64.557

15.30

$1,138.01

15.2%

Chevron

$124.95

7.93

$991.49

0.1%

Select Medical 

$8.96

110.49

$1,547.96

56.4%

Ford

$17.50

56.57

$892.11

(9.9%)

American Water Works

$43.13

22.96

$1,062.13

7.3%

Procter & Gamble 

$81.29

12.18

$1,003.51

1.4%

AvalonBay Communities 

$133.95

7.39

$1,029.65

4%

Cash

   

$0.88

 

Dividends receivable

   

$208.99

 

Total commission

   

($100.00)

 

Original Investment

   

$10,000.00

 

Total portfolio value

   

$11,108.18

11.1%

S&P 500 performance

     

9.9%

Performance relative to S&P 500

     

1.2%

Source: Yahoo! Finance, author's calculations.

I'm not certain how many more weeks in a row I'm going to get to say this, but the Basic Needs portfolio again edged the waffling S&P 500 by a nose for the week, proving the worth of a diverse portfolio filled with cash flow cows and generally impressive dividend yields. Of course, this is a marathon and not a sprint, so our eyes should be on growing outperformance over the long run, rather than week-to-week price fluctuations.

This week we received a healthy dose of dividends, a little bit of earnings news, and a number of individual company news-drivers.

Show me the money!
Let's begin with the smallest dividend yield in the portfolio, financial payment processor MasterCard (NYSE:MA). The company's 0.6% yield is far from exciting from the standpoint of income investors, but when companies give out dividend payments we stick out our hands in thanks all the same. On Friday, shareholders of record as of April 9 received $0.11 for each share they own.

Mastercard Mobile
Source: MasterCard.

As I've stated previously, MasterCard likely has a multiyear double-digit growth opportunity ahead, given that 85% of all global transactions are still conducted in cash. With close to $5.1 billion in net cash and a payout ratio of 15%, even with its enormous share buyback announcement of up to $3.5 billion in December, I believe the groundwork has been laid for ongoing growth in MasterCard's dividend.

Chipmaker Intel (NASDAQ:INTC), on the other hand, went ex-dividend as of May 5, removing our juicy $0.225 per share payout from the company's stock price in anticipation of a June 1 payout. Intel is certainly offering investors a bit of a mixed bag at the moment with PC sales shrinking and its move into smartphones looking like an early dud. However, the chipmaker is also gaining ground in tablets and appears to be winning significant market share in cloud-based hardware. Even with a slowly declining top line in its PC segment, the company looks to be pulling in more than enough cash flow to maintain or even grow its dividend while still funding what might be close to $17 billion in research and development this year.

Finally, water utility giant American Water Works (NYSE:AWK) also went ex-dividend on Thursday with its freshly raised $0.31 per share payout being removed from the stock's share price in anticipation of its June 2 payout. Perhaps more important, American Water Works reported its first-quarter earnings on Wednesday. Its results included a 7.2% increase to operating revenue and a slight reduction in earnings to $68.2 million, or $0.38 per share, from $71.7 million, or $0.40 per share. Best of all, American Water Works reaffirmed its full-year forecast of $2.35-$2.45 in EPS. With the water business being primarily regulated, American Water Works' cash flow is highly predictable and often trending up. It also affords the company the ability to make small acquisitions to grow its business. In other words, it's "steady as she goes" for American Water Works. 

Chevronlogo

Source: Chevron.

Just "hold" it!
We haven't seen much in the way of analyst actions over the past couple of weeks, but on Thursday integrated oil and gas giant Chevron (NYSE:CVX) received a downgrade from research firm Argus to hold from buy with a price target of $130 (implying about 4% upside from Friday's close). Chevron shares have rebounded strongly from their early-year slump as oil prices have risen and helped brighten the prospects for its oil and exploration segment. I understand Argus' position, but once again I suggest you pay little credence to analyst ratings, as they often have a minimal effect on a stock's price and rarely look past the short term.

Hitting high gear
April was actually a "bad" month for automaker Ford (NYSE:F), which reported a year-over-year sales growth of "just" 29% in China during April. Ford China's sales have actually improved 41% through the first four months of the year, although April was its weakest month in 2014. Then again, I'm pretty sure investors would gladly take 29% growth in the world's fastest-growing auto market. The Ford Mondeo has been a big component of these gains, with unit sales up 125% to 39,287 vehicles year to date. The Ford Fiesta also continues to find buyers, with sales more than tripling (up 202%) to 12,249 units year to date.So long as Ford continues to find success in China with the introduction of new vehicles, and also sees ongoing stabilization in Europe, I suspect there's a good chance its shares can head higher.

The secret to a market-beating portfolio lies with dividends
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Ford, Intel, MasterCard, and Waste Management. It also recommends Chevron and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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