- will allow you to sleep well at night;
- require little maintenance and attention;
- permit you to collect a steadily increasing stream of dividends during your lifetime;
- can be will willed to your heirs;
may seem like a daunting task when there is a vast universe of companies from which to select appropriate long-term investments.
In order to assist you in this regard, I have compiled a list of companies I believe would be worthwhile holding in an ideal defensive portfolio. When bought and held for the long-term, the dividend income and growth potential ought to enhance your probability of attaining financial freedom.
The objective of the FFJ portfolio is that, on a comprehensive basis, it will:
- make money in all economic environments;
- augment your wealth by at least 6% above the rate of inflation over the long-term;
- produce an ever increasing stream of dividend income.
I recognize there are companies excluded from this list that have the potential to produce greater returns but I view the minimization of potential losses as equally important as the pleasure of receiving an ever increasing stream of dividend income year after year for the remainder of your life. I have, therefore, purposely excluded companies currently trading at extremely lofty valuation levels in my FFJ Master List of Stocks.
When constructing a portfolio I urge you to consider withholding tax implications when making your investment decisions. If you file a Canadian tax return, you can avoid the 15% withholding tax on U.S. dividends by keeping your U.S. stocks in a registered retirement savings plan or registered retirement income fund. The withholding tax exemption, which is part of the Canada-U.S. tax treaty, does not apply to tax-free savings accounts or registered education savings plans.
You should also be aware that if you invest in companies outside Canada and the US through American Deposit Receipts, the withholding tax is even more onerous and recovery of any withheld taxes is not possible.
Given the above, your after-tax dividend yield on foreign investments could be substantially different from that reflected on various stock screeners.
Another factor some investors overlook when making investment decisions is foreign exchange risk. If you are a Canadian investor who invested in US listed stocks when the Canadian dollar was briefly at par with the US dollar a few years ago, the weakening of the Canadian dollar has had a dramatic positive impact on your portfolio. In recent months, however, the Canadian dollar has strengthened relative to the US dollar so you could be behind the 8 ball even the share price of recent equity investments has appreciated in value.
When creating the FFJ Master Stock List, I set the following guidelines:
- I have minimized the exposure to US banks, tech stocks, and retail companies. I would much prefer investing in the major Canadian banks in that this industry in Canada is an oligopoly. While Canadian banks have stubbed their toes in the past, they fared much better than their US counterparts during the Financial Crisis. I am, therefore, including the 5 major Canadian banks in my list while including one 1 US bank.
I am extremely wary of technology companies. My rationale for thinking this way is that they must constantly be innovating to remain profitable and relevant. Unlike companies in other industries, I honestly have no idea whether the current business model of some technology companies will be relevant in the future.
Retail stocks also frighten me. Companies in this space are always subject to the risk of new low-cost competitors.
- Billionaire Charlie Munger, vice chairman of Berkshire Hathaway which is controlled by Warren Buffett, advises that one should deal only in high-quality companies and own firms likely to increase intrinsic value over most 3 – 5 year periods. I have kept this in mind when creating the FFJ Master List of Stocks and am of the opinion the companies in this list have business models and economic moats that lend themselves favorably to buy-and-hold investing.
As an aside, I enclose” A Lesson on Elementary, Worldly Wisdom As It Relates to Investment Management & Business” in which Munger provides his opinion on multiple business and investing related matters. While 50 pages long, it is a worthwhile read!
- Benjamin Graham, considered the first proponent of value investing, as well as Warren Buffett’s mentor, published “The Intelligent Investor” in 1947. In his book he outlined in detail his investment philosophy and it is now considered an investment classic.
He describes how his approach would be applied by:
- “defensive investors” who are unable to devote much time to the process or inexperienced with investing
- “enterprising investors” who have greater market experience and more time for portfolio management.
In his opinion, defensive investors should confine their holdings to the shares of large, prominent, and conservatively financed companies with long histories of profitable operations. In essence, firms should be of substantial size and with a leading position in its respective industry.
Graham also suggested a minimum of 10 and a maximum of about 30 stocks so as to provide adequate though not excessive diversification. In addition, stock holdings should be reviewed at least annually with attention paid to dividend returns and the operating results of the company, and ignoring share price fluctuations.
The FFJ portfolio is well diversified so that if, in the unlikely event one of these companies was to go bankrupt, the earnings per share growth from the other firms should, in aggregate, still allow you to become wealthier than at the beginning of the previous year.
Here are my recommendations. I currently own shares in the companies reflected in bold. Berkshire Hathaway is the only company on this list which does not pay a dividend.
Automatic Data Processing
Brookfield Asset Management
Canadian National Railway
Church & Dwight
Johnson & Johnson
Philip Morris International
Royal Bank of Canada
Stanley Black & Decker
The Toronto-Dominion Bank
United Parcel Service
Please note I:
- make no assurances or promises about the future long-term performance of any of these companies;
- leave it to you to only purchase stocks after your own independent verification of the facts, consultation with professional advisers if required, and to be willing to accept full responsibility for the consequences of your own investment decisions.