LVMHF - Where To Invest $10000 Right Now?

Summary

• This article is built around one key question: Where would you put $10,000 right now?
• I started by assessing the parameters of this question and presented interesting value-adding answers for my Twitter followers with additional context.
• In light of this context, I explain why dividend growth investing is a smart way to go, using a model portfolio as an example.
• This model portfolio consists of companies with rock-solid balance sheets, decent yields, sustainable and high dividend growth, and a profile of low-volatility outperformance.

Introduction

It's time for a somewhat unusual article. I was planning on writing an article on how I would invest $10,000 right now. However, if we work with a "fake" scenario - after all, nobody forces me to invest $10,000 right now - we might as well take it a step further. Hence, I went on Twitter and asked my followers the following question.

If you had to invest $10K right now, what would you buy and why?

That question itself is interesting. However, we had to establish parameters.

• You are not allowed to sell for at least five years.
• You are allowed to diversify (it doesn't have to be just one thing).

This is still very far from scientific research but coming up with investment ideas for $10K with a minimum holding period of five years and the ability to diversify allows us to incorporate people's longer-term outlook and their diversification preferences.

I don't know about you, but I found this concept highly interesting.

As I told people I was working on an article and I would give them credit, I decided to dedicate this article to the replies. However, instead of firing some Twitter screenshots at you, I decided to structure this article in a way that benefits readers. This includes a discussion of the benefits that come with dividend growth investing and a model portfolio with background information. Even if this scenario is fake, I think there are some interesting takeaways here that can help you in your investment process.

So, let's get to it!

Some Things To Keep In Mind

I was stating the obvious when I said that this research is far from scientific. The most important thing to keep in mind here is that the value of $10,000 differs per person. To some, it's life changing, while others spend this kind of money on an exciting weekend in Las Vegas.

Also, do you need to invest your own $10,000, or do you get $10,000 in this scenario?

As I didn't make this clear before asking the question, we can only assume how people interpreted this fictional scenario.

Let's say you were to get $10,000 to invest. If you were wealthy, you are probably going to invest it into something extremely risky. After five years, you either end up with close to nothing or much more.

If you're barely making ends meet, you probably invest it in the safest investment you can think of. Even if you lose some purchasing power due to inflation, you will be much better off five years from now.

If you're somewhere in the middle, you probably apply a mix of the two.

This brings me to the responses.

What People Are Buying

If you do not have Twitter, feel free to click on this link to get access to the replies to the tweet: LN_Tweet_Responses.pptx

As you will find by clicking on any of the links I provided, there were a few different types of responses.

• Some picked growth stocks with attractive secular tailwinds that might very well deliver blockbuster results in the years ahead. This includes stocks like Amazon ( AMZN ), which is a somewhat conservative pick compared to other stocks that were brought up. As fellow Seeking Alpha contributor Heavy Moat Investments wrote:

• Others went with less-risky stocks that had investment themes they liked. For example, my Twitter friend Timmy O'Toole picked Berkshire Hathaway ( BRK.B ) and luxury consumer cyclical stock LVMH ( OTCPK:LVMHF ), which come with diversified financial, industrial, and consumer exposure. He also believes that in the unfortunate event of Warren Buffett's passing, the stock would benefit from investors betting on major spin-offs and buybacks.

• Some people went with unique portfolio structures to de-risk and benefit from certain macro events that they believe are likely to occur in the next five years. Fund manager Thierry Borgeat went with a construction consisting of energy ( XLE ), financials ( XLF ), defense stocks ( ITA ), healthcare ( XLV ), and gold ( GLD ). While I wouldn't necessarily copy his picks in my own portfolio due to personal preferences, I like his way of thinking, as this is a low-risk way of adding a personal macro-touch to a long-term portfolio.

Or the one below, focusing on energy (renewable and fossil fuels), robotics (growth stocks), gold, and healthcare.

I backtested this portfolio. However, I tweaked things a little bit. I went with 30% energy using the Energy ETF, and I used the tech-heavy ETF ( QQQ ).

This unorthodox portfolio has done extremely well since 2005, returning 11.4% per year with subdued volatility. Why? The reason is complex, but the easy explanation is that gold, healthcare, and technology are somewhat defensive. Energy companies added inflation protection, which shielded the portfolio against mayhem in 2021 and 2022.

• Many others went with commodities. I have the feeling that people with an extremely bearish view of economic growth and financial stability are more likely to invest in precious metals. Others went with a mix of metals and fossil fuels. The comment below would invest it all in silver. While I do not disagree if the plan is to protect the investment, I would go with gold as it's much less volatile.

• Others gave comments that perfectly aligned with my personal strategy, which is based on the benefits of dividend growth. My Twitter friend Nighthawk went with safe and resilient dividend growth stocks, which are listed below.

Tickers: A. O. Smith ( AOS ), Procter & Gamble ( PG ), Johnson & Johnson ( JNJ ), Hormel Foods ( HRL ), Brady Corp. ( BRC ), Aflac ( AFL ), Sanofi ( SNY ).

He even included the screener he used to arrive at his picks. As you can see below, he went with high dividend safety, low payout ratios, positive and consistent dividend growth, consistently positive free cash flow, healthy balance sheets, and mainly large companies.

Historically speaking, this is the single best strategy to build wealth using the stock market. High-quality dividend stocks tend to fall less during bear markets and perform rather well during bull markets. The result is a mix of low-volatility stock market outperformance.

While I wouldn't divide $10K over seven stocks, he's on to something, as the data below shows. I took the liberty of putting these stocks into a portfolio screener.

What we see is that an equal-weight portfolio consisting of these stocks has returned 11.3% per year since 2003. This beats the market by roughly 130 basis points per year, turning $10,000 into $85,400. Even better, this seven-stock portfolio had a lower standard deviation than the market. The max drawdown was 40%. The market correlation was 80%.

Buying these stocks - or similar - does not guarantee that one doesn't lose money five years from now. After all, we could enter a deep recession. Something bad could happen.

However, buying these companies comes with a great mix of:

• Investing with subdued risk in the stock market.
• Benefiting from a dividend.
• A high likelihood of outperforming the market.

With all of this said, here's what I would do.

How I Would Invest $10,000 Right Now

If I had to invest $10,000 right now, I would go with a limited number of dividend growth stocks. In this article, I'm giving you five stocks that each pay a dividend with satisfying dividend growth. This is not necessarily a priority when holding stocks for just five years. However, I want to give you stocks that I would hold way beyond the five-year holding period and prove that the theories supporting this strategy do work indeed. This includes incorporating a mix of strong potential returns and a low likelihood of high losses during these five years.

I went with the following breakdown:

• Defense . In my real-life portfolio, I have close to 25% aerospace and defense exposure, as I believe in the qualities this industry brings to the table when it comes to anti-cyclical revenue growth, healthy balance sheets, decent yields, and sustainable dividend growth.
• Healthcare . I like healthcare because of its defensive characteristics and pricing power. It adds more low volatility to the portfolio. And, while it doesn't matter too much on a shorter-term basis, healthcare benefits from strong secular tailwinds like an aging population and new capabilities to treat things we couldn't treat before. It's a great way to add defensive innovation without having to buy growth stocks. In this case, I went with an ETF, as I wanted to exclude single-company risk. Especially on a short-term basis, single-company risks can be high in the healthcare industry.
• Railroad . I'm a big fan of railroad stocks. Especially North American Class I railroads are known for decent yields, high dividend growth, and huge moats, thanks to their dominant position in every single supply chain imaginable.
• Technology . I also wanted to add higher growth to the portfolio. Hence, I went with a technology company. However, I did not go with a company that is immediately associated with the tech industry, as I will show you in this article. When done right, a technology stock can add long-term conservative outperformance to one's portfolio.
• Real estate . Buildings aren't going anywhere. Historically speaking, real estate investments are among the most stable sources of income. On top of that, most are great inflation hedges.

So, essentially, I went with a mix of companies in different industries that all have strong pricing power, high moats, or the ability to grow in a fragmented market. Moreover, all companies have an A-rated balance sheet!

These are the companies I went with:

• Lockheed is my largest dividend growth investment. The company is the backbone of NATO defense forces, with a moat so large that it can be seen from space. I added this company instead of an ETF as it comes with an attractive yield and consistent dividend growth. Needless to say, its bullet-proof business model comes with an A-rated balance sheet.
• The healthcare ETF was added for reasons I already briefly mentioned. I wanted to avoid single-stock risk. Who knows what will happen in the next five years? By buying the ETF, we own every healthcare niche. Moreover, while its yield isn't very attractive, it comes with high dividend growth and low risks due to diversification benefits.
• Union Pacific is one of my all-time favorite stocks. The railroad dominates the West with its Buffett-owned peer BNSF. The company is critical to the US economy. That said, the company is the most cyclical stock on this list. If a severe recession were to hit, the company could be down five years from now. However, its business is so strong that I would trust it with a big part of my net worth, which is what I'm doing in real life.
• Automatic Data Processing isn't a tech stock - at least not officially. However, the company is a rapidly-growing provider of human resource management software and services. It benefits greatly from outsourcing. Hence, I think it's a tech-ish company with a rock-solid balance sheet, consistent dividend growth (it's a dividend aristocrat), and a somewhat decent yield. Note that I also considered going with Microsoft ( MSFT ). However, it felt wrong backtesting a five-stock portfolio that includes MSFT, as its stunning performance would have significantly skewed the total portfolio performance.
• Public Storage is America's largest self-storage provider. The company just hiked its dividend by 50% after investing in its business without any hikes since 2016. The company has a 4.0% yield, a terrific business model, and plenty of growth opportunities in a highly fragmented market. While rising rates hurt for now, I believe that PSA will continue to be a terrific outperformer for decades to come.

This portfolio gives investors an average yield of 2.6%, which beats the S&P 500 by roughly 100 basis points. Long-term dividend growth is in the low double-digit range.

As the data below shows, this portfolio would have turned $10,000 into $224,000 between January 1999 and January 2023. This is a return of 13.8% per year, which beats the S&P 500 by more than 600 basis points per year. Moreover, the standard deviation is significantly lower. The same goes for the worst year (just -12%) and the max drawdown of 38%.

Moreover, this performance is very consistent, as the numbers below show.

As expected, based on the theoretical framework, this portfolio outperformed the market in every major drawdown of the past 23 years. However, the portfolio underperformed in the first year after these drawdowns. In "normal" years, the portfolio kept up with the market. The result is long-term outperformance with subdued volatility.

Over the past three, five, and 10 years, this portfolio has returned double digits every year with subdued volatility.

Moreover, and with regard to the fictional holding period of five years, the historical drawdowns of this portfolio have been very short. The longest recovery time was one year and eight months. The max underwater period was two years and two months. This beats the market by two years and eight months.

While I could have gone with so many similar examples, this portfolio comes with:

• Rock-solid companies with fantastic track records.
• A decent average dividend yield and consistently high dividend growth.
• Fantastic balance sheets.
• Satisfying diversification despite a low single-stock count.
• Subdued volatility.
• Long-term outperformance.
• "Mild" drawdowns.

Nobody knows what the world will look like five years from now, but the odds are in our favor that this portfolio will do just fine.

Takeaway (Dividend Growth Wins)

In this article, we discussed where to invest $10,000 right now. I used multiple examples from Twitter readers, which revealed a lot of interesting options. I added examples and context to come up with some interesting food for thought. I also presented my own solution, as I believe that a dividend growth strategy is the way to go. In my example, I used four stocks and one ETF, which formed a well-balanced mix of stocks that came with low financial risks, a decent yield, consistent dividend growth, subdued volatility, and long-term outperformance.

So, if there's anything I want people to take away from this, it's the following:

• Multiple roads lead to Rome. As long as people are diversified and aware of the risks they need to cover on a long-term basis, they will be fine.
• Investment decisions are highly dependent on one's personal situation.
• Dividend growth strategies are great ways to protect and accumulate wealth on a long-term basis.

That said, we barely scratched the surface here. There are a million ways to construct a portfolio applying dividend growth strategies and similar.

Please let me know if this is something you're interested in, as I might write similar articles in the weeks ahead.

Also, let us know in the comment section what you would do with $10,000!

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