As the new decade arrives and investors make new resolutions on how to put their money to work, it's a good time to remind ourselves that constructing a good, all-weather portfolio takes some effort and time. Not only should the portfolio display decent growth characteristics, but it should also be able to generate passive income and be able to withstand severe stress factors such as industry busts and recessions.
I've made my fair share of investment adjustments over the years; I have had to tweak my portfolio numerous times based on my own investment goals and targets. But the good thing is that I've also learned a lot along the way, through both experience and making (silly) mistakes.
The economy has been fairly resilient in the past year, and hopefully, most salaried employees would have obtained a good raise plus year-end bonus. If anyone has $100,000 to spare for investments, here are some suggestions on where and how to deploy that cash.
A swath of growth companies
As growth is an important component of any investment portfolio, I would allocate around $40,000 to growth stocks. The reason for the smaller allocation as compared to dividend stocks is because growth stocks are generally priced more expensively and are thus more sensitive to economic cycles.
I would place $10,000 each in Facebook (NASDAQ:FB), Starbucks (NASDAQ:SBUX), Nike (NYSE:NKE) and Visa (NYSE:V). Facebook has been steadily growing its monthly average user numbers for the last 12 quarters, hitting a high of 2.45 billion as of Sept. 30, 2019, with revenue and net income both up double digits year over year. Starbucks posted net store growth of 7% year over year for fiscal 2019; grew its rewards membership in the U.S. by 15% year over year to 17.6 million; and upped its quarterly dividend to $0.41 per share.
Nike continued to post strong results in the first quarter of its fiscal 2020, with revenue up 7% year over year, gross margin expanding to 45.7% from 44.2%, and net income surging 25% year over year. Visa, though already a behemoth in the payment services industry, still managed to grow revenue 11% in its fiscal 2019, as well as net income growth of 17% year over year.
A smattering of dividend-yielders
Growth companies aside, it's important for an investor to have a smattering of good dividend-yielding stocks. Such stocks provide a stable source of passive cash flow for the investor to either supplement income or provide cash inflows for retirement. Key factors in choosing dividend stocks include the consistency and stability of the income stream. The choice should not be solely dependent on the magnitude of the dividend yield.
I would allocate around 50% of the $100,000, or $50,000, into a smattering of both real estate investment trusts (REITs) and a business development company (BDC). First the REITs: I would allocate $20,000 each to Simon Property Group (NYSE:SPG) and Macerich (NYSE:MAC). Simon is paying out an annual trailing-12-month quarterly dividend of $8.30 per share for a 5.6% dividend yield, while Macerich paid out an annual 12-month quarterly dividend of $3 per share for an 11.1% yield. Despite the high yields, both have manageable payout ratios by REIT standards. Combining these two dividend streams using $40,000 should yield the investor around $3,300 a year in dividends.
The remaining $10,000 can be invested in New Mountain Finance (NYSE:NMFC), which has demonstrated a great track record of paying a steady $0.34 quarterly dividend over the past few years. New Mountain's dividend yield is around 9.9%, and an investment in the company should yield around $990 worth of dividends per annum. While its payout ratio may seem high, around 120% over the past 12 months, investors should note that as a result of its portfolio of private investments, the company will have to make periodic adjustments to their fair values. This will introduce unrealized gains or losses to the income statement that have no impact to cash flow. What's important is that New Mountain Finance is receiving regular and consistent dividend and interest income from its investments, which are able to power its dividend payments.
Together, these three dividend stocks will provide a cash flow of around $4,300 a year, or around $360 a month.
Keeping cash handy
For the remaining $10,000, I would suggest keeping it handy as an opportunity fund. This acts as a cash stash that is ready to be deployed when markets crash (for whatever reason) and valuations plummet. It's important to have cash handy to take advantage of such opportunities, and I will always advise investors to carve out a portion of their investible cash to act as a cash buffer.
Portfolio management is key
Portfolio management is the key to owning a well-performing portfolio that can weather downturns. By having a good mix of growth plus yield, the investor is positioned for both long-term growth and passive income. Keeping cash handy allows for the quick deployment of cash into enticing investment opportunities.