Top 5 American stocks for a retirement portfolio

It is believed that the long-term stock market gives from 8% to 12% per year, and managers worldwide take these dynamics as the basis of their expectations. However, you can build a portfolio of top growth stocks, which will be tested over time. You can find them using a simple algorithm.

Age matters

The first and most obvious criterion for selecting shares for future retirement is the company’s age. On average, pension strategies are targeted at 20-30 years and go up to 45 years. For example, Vanguard, the world’s largest provider of mutual funds and pension funds, is the deadline set for their clients.

The logic is that an investor who associates a future pension with the shares of a particular company must be sure that it will live up to this pension with him. In addition, the age of the issuer is essential for detailed analysis:

• How securities behave in different economic cycles.
• How they go through a generational change in management.
• How firmly they hold their niche.

For a person over the age of 30, who still has the same period before retirement, it is entirely appropriate to filter for companies “at least 30 years old”. For those who are older, you can raise the bar even higher. Today, of the companies traded in the US, which is more than 8000, 80% are “young people” who went public after 1995. Let’s leave them for those who will retire in 40-50 years, current students, and schoolchildren.

 The goal is to take a closer look at 20% of issuers who trace their history since the early 1990s and have accumulated a margin of safety decades to come. Among large companies, the age criterion, for example, does not include Amazon, Google, and Facebook, which have been listed on the stock exchange since 1997, 2004, and 2012. respectively. This includes Apple (since 1981) and Microsoft (since 1986).

How much to take in billions

The following important criterion is the size of capitalization. Here the rule works: if a company has been on the market for a long time and is successful, it should have managed to grow to the chips of the first echelon. Since the early 1990s, the S&P 500 broad market index has grown by an average of 8-9% annually and has increased 11-fold in points. To select stocks that have performed at least as good as the broad market, you need to take those that have grown more than 11 times.

Traditionally, in the United States, a medium-sized business is considered to be worth no more than $ 2 billion, hefty – from $ 10 billion. However, if we need to find companies that were already mature in the early 1990s and since then have grown no worse than the market as a whole, now they should be worth over $ 100 billion.

This dramatically narrows the search: only 74 companies traded in the USA (by the way, not only American ones) are over 30 years old and have a capitalization of more than 100 billion. Remarkable chips such as AMD or Micron, which are now on the market, fall under the screening. $ 98 and $ 94 billion, respectively. At the same time, Sony and General Electric, which have a size of more than $ 120 billion, easily fall into the sample.

Dividend Question

For most of the history of the exchange, dividend securities have given higher yields compared to shares of companies that do not pay them (including reinvestment). However, in the last decade, this is no longer quite the case: many successful large companies reinvest all their profits in their business and grow faster than the market as a whole—for example, Adobe.

But the general approach to asset management has not changed. If a company pays dividends, it signifies its maturity, a positive attitude towards minority shareholders, and effective cash flow management. At low rates, it is profitable for a business to borrow on the market using cheap leverage and distribute the profit in dividends. It also improves the quality of investments: own funds can be invested unsuccessfully, and borrowed funds will be rechecked by lenders.

For a portfolio with an eye on 30 years, the size of the dividend is not essential. The main thing is that it exists in principle. Moreover, a low premium is even better in this case: corporations tend to gradually ramp up payouts to maintain a continuous payout history. Hence, with a low dividend base of 0.3–0.5% per annum, the most significant growth potential.

Leaders of the Decades

The most objective indicator that a company is performing better than its competitors is the long-term dynamics in the market. If for 30 years the corporation has consistently beat the broad index, then there are fundamental reasons for this: unique technologies, a strong position in the sector, a unique corporate structure. These stocks pull the entire index, compensating for the fall and stagnation of the rest of the issuers included in it.

The majority of financial companies and banks that left the race in 2008-2009 do not fall under the criterion of stable growth. (Bank of America, Citigroup). Later, they were joined by telecommunications giants (AT&T, Verizon), which exhausted the growth potential of mobile networks, as well as oil and gas majors undergoing ecological restructuring (Exxon Mobil, Chevron).

Technology companies are expected to be among the growth leaders over the past 30 years. For example, Apple beat the broad market more than 30 times, Cisco – almost 40 times, Oracle – 50. Moreover, with an average annual market return of no more than 9%, these chips brought 21-23% per year, which gave such a powerful effect compound interest.

But in recent years, some of the long-term leaders are smoothly moving into the rank of moderately growing. So, since 2015, Oracle has increased by 80%, Cisco by 53% – against more than + 100% according to the S&P 500 index. Both companies began to lag behind the market in the late noughties when they were pushed by new hardware vendors and software developers.

Stable growth above the index over a horizon of 5 to 30 years is shown by only a few dozen of the oldest companies with a capitalization of $ 130 billion, which are worthy included in any long-term portfolio, including for future retirement.

What to take in your retirement portfolio

Of the above securities, the most impressive dynamics in 30 years are shown by the top 3 of the list: UnitedHealth Group, Starbucks, and Applied Materials. They managed to break away from the index and from the modern heavyweights of the market. Over the past 20 years, the top 3 are Apple, UnitedHealth, and Thermo Fisher Scientific. For 10 years in the leaders of ASML, Apple, and Microsoft, for 5 years – ASML, Applied Materials, and Apple.

At the moment, not all candidates for the pension portfolio look fundamentally strong. For example, Home Depot has a huge debt – about 20 sizes of its own assets, Starbucks shares are heavily overbought: the current P / E is 135.3 points, the forward – 31.4. On the other hand, Nike looks less overheated and expensive (P / E = 63.3).

Microsoft, UnitedHealth, McDonald’s, Danaher Corporation, and Lowe’s do not raise questions. This set of papers will cover five key areas at once, in each of which the company is confidently leading: digital economy, finance, healthcare, catering, and non-food products. For each of them, the current target values ​​of the shares are higher than the market ones.

Investments need to be made regularly to ensure future aging, and broad market funds can be the basis for a portfolio. However, some companies have been consistently outperforming indices for decades, and it would be a sin not to take advantage of this. In our review, the leaders are MSFT, UNH, MCD, DHR, and LOW. They have been market for over 30 years, cost $ 130 billion to $ 1.9 trillion, and bring in from 12% 21% per year dividends, which they also have. Of course, you shouldn’t limit yourself only to these securities, but today they are one of the best long-term stocks.