Being confident in your portfolio is terrific for peace of mind. A sleep-well-at-night (SWAN) strategy for stock picking is a goal for many long-term investors. SWAN stocks don't need to be followed daily. Free cash flow, dividends, or buybacks, and operations in secular growth industries are three things to look for in these stocks.
If you have $1,500 in an investment account, whether from dividends, selling a winner or cutting losses on a loser (it happens), or monthly deposits adding up, these stocks may be an excellent place to invest for the long term.
A different kind of chip company
Nvidia (NVDA 6.18%) has the investing world buzzing with its spectacular performance and cutting-edge tech (more on this later). But first, another semiconductor company is doing wonders for investors: Texas Instruments (TXN 1.27%). Texas Instruments sells analog semiconductors and embedded processors. These chips are not utilized in high-tech data centers like Nvidia chips, but in cars, industrial plants, and everyday products. You probably use dozens of them daily without knowing it.
Here are just a few examples:
- Cars: Driver assist systems, traction control, crash sensing, sound systems, etc.
- Medical devices like MRI and CT scanners and pacemakers
- Industrial manufacturing systems and robotics
- Consumer-facing items like home security systems, thermostats, cellphones, and laptops
The massive market allows Texas Instruments to service 100,000 customers with 80,000 products and pass along the fruits to investors. Texas Instruments is known as one of the best cash management companies in the world. Over the last 19 years, the company has increased the dividend at a compound annual growth rate (CAGR) of 25% while reducing the share count by nearly half with stock buybacks, as depicted below.
TXN Dividend data by YCharts.
The dividend currently yields 3%, which may not seem remarkable to some investors who equate higher yields with better returns. But dividend growth investing often crushes yield investing. Few grow their dividends better than Texas Instruments.
Nvidia
As promised, let's talk about the phenomenon that is Nvidia. If you work in an office that utilizes cloud software and workflows, you understand that performance is critical. The software relies on data centers to store, manage, and process the data; Nvidia's solutions make it all possible. Artificial intelligence (AI) is unleashing a wave of new software that needs incredible processing power. This ensures that the demand for Nvidia will stay high for the foreseeable future. The biggest limitation for Nvidia right now is keeping up with the demand. This is a good problem to have.
Nvidia's results for the fiscal second quarter of 2024, ended July 30, 2023, were fantastic, with total revenue up 101% year over year to $13.5 billion. Data center sales exploded 171% to $10.3 billion. The company has forecast $16 billion in sales next quarter, which would be a year-over-year increase of 170% and sequential growth of 18%.
Because of the demand for its products, Nvidia has enormous pricing power. This means higher margins and increased free cash flow. The operating margin rose to 50% last quarter, and Nvidia has produced $8.7 billion in free cash flow through the first half of the fiscal year (more than all of fiscal 2022 and 2x more than fiscal 2023).
The stock price has doubled this year; however, it has come down 11% off its recent high. Many are concerned with the price-to-earnings (P/E) ratio over 100; however, on a forward basis, it drops to 40 and the year after to 27, according to estimates. Given the massive demand and AI tailwinds, I believe it is likely Nvidia knocks estimates out of the park, making the stock a great pick.
Visa
Visa (V -0.23%) powered almost 40% of worldwide credit and debit card transactions in 2022, more than any other payment processor. As the world becomes increasingly cashless, Visa is producing record results with strong tailwinds. It made $24 billion in revenue through the third quarter of fiscal 2023, ended June 30, on 12% year-over-year growth. It also had an incredible operating margin of 62%.
As you probably guessed, this leads to oodles of free cash flow, more than $13 billion through Q3 of this fiscal year (a more than 50% margin). Visa returns these funds to shareholders through buybacks and dividends, which have totaled $10.6 billion this fiscal year.
Visa is also resistant to inflation. It makes most of its money by taking a percentage of transaction values. When prices rise, so does Visa's revenue. This is an excellent advantage during economic uncertainty. The business would be negatively affected by a recession in which consumers cut back on spending; however, the business model is capital-light and adaptable.
The stock trades at a price-to-earnings (P/E) ratio of 30.5, lower than the five-year average of 35.
Splitting $1,500 among these stocks gives long-term investors access to three growing markets with highly profitable companies. Investors could overweight Nvidia for a more aggressive approach or overweight Texas Instruments and Visa for less volatility. Any way you slice it, these companies are terrific picks.
