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The Basic Needs Portfolio

By Sean Williams – Sep 16, 2013 at 5:41PM

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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!

In May, I announced my intention to create a portfolio that embodied life's basic needs. Understandably, many of the truly basic needs in our everyday lives have transcended far beyond just the need for water and shelter. 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 and bear markets, and command incredible pricing power in nearly any economic environment.

If you'd like a closer look at what my reasoning was behind each selection, you can do so by clicking on any, or all, of the following portfolio components:

Let's look at how our portfolio of basic needs stocks fared this week.

Company

Cost Basis

Shares

Total Value

Return

Waste Management

$42.60

23.24

$950.28

(4%)

Intel 

$23.22

42.64

$999.48

0.9%

NextEra Energy

$87.94

11.26

$892.02

(9.9%)

MasterCard

$645.57

1.53

$1,019.61

3.2%

Chevron

$124.95

7.93

$984.43

(0.6%)

Select Medical

$8.96

110.49

$910.44

(8%)

Ford

$17.50

56.57

$981.49

(0.9%)

American Water Works

$43.13

22.96

$902.10

(8.9%)

Procter & Gamble

$81.29

12.18

$962.83

(2.8%)

AvalonBay Communities

$133.95

7.39

$954.71

(3.6%)

Cash

   

$0.88

 

Dividends receivable

   

$48.09

 

Total commission

   

($100.00)

 

Original investment

   

$10,000.00

 

Total portfolio value

   

$9,606.36

(3.9%)

S&P 500 performance

     

(1.3%)

Performance relative to S&P 500

     

(2.6%)

Sources: Yahoo! Finance, author's calculations.

As you might have anticipated with a portfolio of basic needs stocks, dividends were once again the talk of the week, with two companies paying out their quarterly distribution and another announcing their third-quarter dividend.

Show me the money!
Although it's been far and away the worst performer thus far, electric utility NextEra Energy (NEE -1.95%) delivered a $0.66 per-share dividend to shareholders as of today. Electric utilities provide some of life's most basic necessities (electricity), but they also have a tendency to underperform when the market is roaring higher since they're most often viewed as defensive plays. I wouldn't read too much into NextEra's recent weakness, especially considering that its energy portfolio is focused on promoting rapidly growing and clean alternative energies.

In addition to NextEra, shareholders in Chevron (CVX -0.76%) on Tuesday received their quarterly $1 per-share stipend. On top of receiving this hefty dividend, shareholders were also treated to good news when Chevron announced a settlement with Brazilian lawmakers who levied $17.5 billion in lawsuits against it and Transocean for an oil spill in Nov. 2011 for a mere $42 million. Owning a global oil giant like Chevron does expose investors to the possibility of adverse events like a spill; however, rarely -- with the exception of the BP spill -- do these adverse events translate into monstrous fines and penalties.

We also heard from rental REIT AvalonBay Communities (AVB 1.48%) this week, which announced a third-quarter dividend of $1.07 that'll be payable to shareholders on Oct. 15 that are on record as of Sept. 30. If I were an AvalonBay shareholder I would be pretty excited about the prospect of 30-year mortgage rates rising. Higher lending rates tend to discourage prospective homebuyers from pulling the trigger and have the effect of pushing those people back into renting. I find it very likely that AvalonBay's pricing power and occupancy rate is only going to improve moving forward.

But don't forget these moves ...
Payment processing facilitator MasterCard (MA -0.85%) had a particularly strong week after receiving a price target boost on Thursday from Jefferies to $758, with the research firm holding to its "buy" rating on the company. The reason for the target price hike relates to the 85% of worldwide transactions still being conducted in cash, giving MasterCard ample opportunities for growth over the coming decades. This is a point I've touched on numerous times and is a primary reason I selected MasterCard to this basic needs portfolio. Also, as a bonus, keep in mind that since MasterCard is a payment processor and not a direct lender, it has zero worries about consumer credit quality.

Also not to be overlooked, water utility American Water Works (AWK -2.28%) announced an increase to its revolving credit limit of $250 million to $1.25 billion while also pushing $1.1 billion of existing debt due in October 2017 out an additional 12 months. The move makes sense given the historically low lending rates we're seeing right now. It's even more important if you consider that the water utility business sees most of its growth through synergies from acquisitions, so expanding American Water Works' available credit looks like a smart strategic move.

Back to basics
Despite the S&P 500 having a very good week, this portfolio of conservative and basic needs stocks managed to outperform it, albeit marginally, by 0.1%. So far this portfolio is doing everything expected of it; it's producing substantial dividend income and it's not causing us to lose sleep overnight with wild vacillations. Over the next three years I expect the combination of dividend income and projected outperformance in both boom and bust economies to drive a substantial outperformance over the S&P 500.

Check back next week for the latest update on this portfolio and its 10 components.

Fool contributor 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 recommends Chevron, Ford, Intel, MasterCard, Procter & Gamble, and Waste Management. The Motley Fool owns shares of, and recommends, Ford, Intel, MasterCard, and Waste Management. It also owns shares of Transocean and recommends Chevron and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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Stocks Mentioned

Chevron Corporation Stock Quote
Chevron Corporation
CVX
$143.67 (-0.76%) $-1.10
Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$284.34 (-0.85%) $-2.43
NextEra Energy, Inc. Stock Quote
NextEra Energy, Inc.
NEE
$78.41 (-1.95%) $-1.56
American Water Works Company, Inc. Stock Quote
American Water Works Company, Inc.
AWK
$130.16 (-2.28%) $-3.04
AvalonBay Communities, Inc. Stock Quote
AvalonBay Communities, Inc.
AVB
$184.19 (1.48%) $2.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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