LIN - How I'd Invest $1 Million Right Now

2023-10-20 16:53:26 ET

Summary

• Several authors have recently shared their model portfolios for investing $1 million, here's my take on the matter.
• My approach is a bit different from recent articles, prioritizing growth and including stocks that don't pay dividends.
• I believe this portfolio of high-quality, growth-oriented stocks will generate reliable passive income and outperform the market.

In recent weeks I've seen several Seeking Alpha authors pen pieces highlighting model portfolios that they construct with their highest conviction ideas today.

My colleague at Dividend Kings, Dividend Sensei, wrote this article , describing how he'd build a $1 million retirement portfolio meant to generate $50,000+ in annual income.

Rida Morwa wrote an article this week regarding the construction of a $1 million portfolio, putting a spotlight on his "rule of 42" and bullish outlook on utilities.

My colleague at iREIT on Alpha, Brad Thomas, wrote this article , breaking down how he'd invest $1,000/month in today's market environment.

I love challenges like this. And I wanted to join in on the fun, highlighting the stocks that I'd buy today if I magically came across a large financial windfall…because my strategy would be different from the yield-centric picks that I've seen from others thus far.

Don't get me wrong, I love passive income. And my portfolio is going to be chock full of high quality dividend growth stocks. But, the "growth" aspect here is going to reign supreme for me in today's market environment.

I'm even going to include several stocks that don't pay dividends at all.

I believe that the compilation of stocks that I've put together below would create a durable, long lasting passive income stream that will compound at a rate that far exceeds inflation.

Furthermore, because of the high quality nature of these picks, their secular growth tailwinds, and their attractive valuations in the present, I believe that this portfolio would not only generate reliably increasing passive income, but also overall outperformance relative to the major market indexes.

Lastly, I should note that this is perfect timing for an exercise like this for me. I'm not making as many trades these days as usual because I'm allocating a large portion of my savings towards upcoming home renovations. Yet, I know that readers want to know what I'd buy if I had more capital available to put to work in the market, so putting together this model portfolio is a quick and easy way for me to put a spotlight on my highest conviction ideas in the market today.

I know that to many people, $1 million to invest seems like a lot. But, I think it's a nice round number that many people can either relate to when it comes to their current portfolios or retirement aspirations.

In late 2019 the Federal Reserve Board released a study showing that the average US household net worth was $748,800. The stock market is up roughly 35% since the end of 2019. And real estate values in most markets around the country are up double digits since then as well. With that in mind, I wouldn't be surprised to hear that the average is probably right around $1 million today.

Granted, a lot of that net worth is tied up in primary residences; but either way, studies show that Americans believe that they need $1.27 million for retirement (on average) and therefore, I'm not surprised that this $1 million portfolio idea is resonating with readers.

In late 2022, NerdWallet released a study showing average net worth figures lower than my estimate, however.

And the median figures in the NerdWallet data are much lower than the mean, which makes sense, being that the top 1% or so of Americans own a disproportionately high percentage of overall wealth.

With all of that in mind, I'm structuring this model portfolio in a way that it translates nicely into any net worth situation.

When thinking about my picks here, I wanted to build a diverse portfolio that would meet the financial needs of the majority of investors.

Sure, everyone's financial situation is different and therefore, there is never going to be a one size fits all portfolio solution to each reader's financial goals.

But, with all due respect to my colleagues and peers who've published similar articles recently, I think the approach that I took would work for more theoretical investors because of its focus on well-rounded companies with strong long-term growth prospects as opposed to being a collection of slower growth, more income-oriented picks.

I've said this many times in the past, but I'll happily type it again: no matter how old someone is, I think it makes sense to own a broad array of stocks that cover the entire spectrum from high growth to high yield.

I feel pretty strongly about that because I know that running out of money in retirement is a big concern for everyone, regardless of where they might be on their financial journeys.

I'm 33 years old, so God willing, I still have decades and decades to live.

Therefore, I want to ensure that I have adequate exposure to companies with secular growth tailwinds in my portfolio to ensure that my wealth (and passive income) grows at a rate that exceeds inflation over the long term.

But the thing is, you don't have to be in your 30s to share this reality.

Looking at average life expectancy statistics, people in the 50s and 60s still likely have decades left to live.

If you live a healthy lifestyle and have strong genetics on your side…even at 80 years old you could still have a multi-decade time horizon out in front of your portfolio.

That's a lot of inflation to contend with…and using growth to protect your wealth and the purchasing power of your passive income stream throughout retirement should still be top of mind.

With that in mind, here's the portfolio that I created as an answer to the question, "How would I invest $1 million right now?"

A Well Balanced, High Conviction Portfolio

As you can see, I selected stocks from various categories on my watch list, resulting in a collection of companies with average upside potential of approximately 18.4% (which is just capital gains, it doesn't include dividend yields).

Many of these companies are in deep value territory (relative to my personal fair value estimates).

Others are trading with relatively thin margins of safety; however, I wanted to focus on the highest possible quality here, and with long-term growth in mind, I was more than happy to pick wonderful companies trading at fair prices, in certain cases (such as SPGI or WM) because I view these as SWAN holdings (sleep well at night) due to their long-term growth prospects.

There are many blue chips that I left out, but I thought that 25 holdings is probably right around the sweet spot for most investors who like to pick stocks.

This was primarily due to present day valuation issues (at least, on a relative basis to my picks). But I have to say, it pains me not to include certain companies, like Microsoft ( MSFT ), Moody's ( MCO ), MSCI ( MSCI ), Mastercard ( MA ), or Linde ( LIN ) in this model portfolio.

I'd be looking to add names like these - some of the highest quality growth companies in the world - to the portfolio if/when they experience significant share price weakness. And that's why I'm leaving a couple of my 25 slots open with the money market funds positions.

Over the long term, I'd really want to replace that cash with shares of a stock that is going to reliably compound its fundamentals and provide dividend growth. But, since SPAXX currently yields 5% there's no rush to do so.

Holding money market funds boosts this portfolio's overall yield and the flexibility that comes with cash is likely to provide better sleep at night. I hold cash in my personal portfolio for these same reasons (risk-free yield + flexibility moving forward) and I was happy to include a high yielding money market fund in this model as well.

Looking at the more income-oriented aspects of this portfolio, here's the data:

Above you'll notice that every single stock carries a strong, investment-grade credit rating.

They also all have proven histories of reliable bottom-line growth.

In recent articles, I've talked about my focus on compounders because I'd much rather rely on fundamental growth for my long-term gains than mean reversion.

These metrics factor heavily into the SWAN nature of this portfolio…and because of the market's recent sell-off, which has driven many of these stocks down into value territory, investors here would get to have their cake and eat it too when it comes to multiple expansion and fundamentals.

Furthermore, of the stocks that pay dividends, most have decade-plus long dividend growth streaks and as you can see, I expect to see each and every single one of these dividend payers to raise their dividends again in 2024.

I love knowing that I'm not only making money while I sleep… but those payments are reliably increasing over time.

Looking at the forward EPS CAGR estimate that I provided, this likely isn't going to be a 1-year trend either.

These are all blue chip stocks with strong cash flows, balance sheets, market share positions, and long-term growth prospects. With that in mind, I think a portfolio like this one would not only provide reliable dividend growth over the next 12 months, but over the long-term as well.

Conclusion

To me, investors looking to invest in stocks should focus on the highest quality companies that they can find trading at fair value (or better) and plan to hold them over the long term.

That's what enables the compounding scenario, associated with rising fundamentals and annual dividends, to really kick into high gear, resulting in long-term outperformance.

I can't say with certainty that this portfolio will outperform the S&P 500 or the Nasdaq over the next 5-10 years…but these are the types of stocks that I'm putting my personal money behind when it comes to building wealth and reaching financial freedom.

I've come to the conclusion that quality is going to win out over deep value or speculative growth over the long term. The focus here was on companies that perpetually compound cash flows and generously return that money to shareholders.

These stocks are all proven winners and while the past isn't something that can accurately predict the future, I suspect that it will in the case of these 23 companies.

For further details see: