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10 stocks you have to have!

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by Peter Switzer

It was another day drifting downwards for the Dow and you can blame the lack of any good news and the general waiting or hanging around for a reason to buy. The Dow only lost 31.26 points to finish at 12,573.27 and so as nothing big is doing, let me share with you 10 stocks that a legend of broking says you have to have in your portfolio.

Last night I had Michael Heffernan, economist and client advisor at Lonsec — and a legendary stock broker in this country — on my TV show “Switzer” on Sky News Business Channel. I asked him to look at those people out of stocks right now, who might want to start dipping their toe back into the pool of stocks. And I asked for 10 stocks, which could be the core of a portfolio, despite the fact that I like 20 in a portfolio so I only have a five per cent exposure to each stock.

Heffo had the same attitude as me that dividends are critically important but you want stocks that will do pretty well when the share indexes eventually spike higher, which they always do after a period of market malaise. Want proof? Look at these years for Aussie shares: 1980 – 48.8 per cent; 1983 – 66.8 per cent; 1985 – 44.1 per cent; 1986 – 52.2 per cent; 1991 – 34.2 per cent; 1993 – 45.4 per cent; 2004 – 27.9 per cent and; 2009 – 37.6 per cent. By the way, over that period there were at least seven years where the gains ranged from 10 to 25 per cent and so when the rubbish clears from Europe and China, and the USA starts to grow, stocks will roar back. It’s a waiting game we’re in right now.

Top stocks

So here is what Heffo likes:

Telstra
The four Big Banks
Tatts Group
Tabcorp
Coca Cola
Woolworths
Wesfarmers

When you look at this lot, they are good dividend players. The last two are OK pay up merchants, but they are reliable companies that dominate their industry sector. Also note, they are companies that people deal with all of the time, in recessions and booms — banks, betting, Coke or Mt. Franklin, Woolies and Coles.

Smart investors select stocks that pay dividends because when you look at the history of stock returns, half of them come from dividends. Also the best strategy you can have in retirement is to have a capital base that can go up or down with the stock market but the dividends remain about the same.

Say you had $2 million in stocks. With dividends and franking credits your return could be close to 10 per cent and so that’s $200,000. Even if the market crashed and your capital went to $1.5 million, your dividends might only go to $150,000 but I would bet they would be closer to $170,000.

And so for a few years you might have to cope with $170,000 a year instead of $200,000 while you wait for your capital rebound and grow as the market eventually recovers. By the way, my estimation of how much your dividends might fall was pretty big at 15 per cent.

Wall Street overnight

For news junkies, Wall Street was disappointed with the Fed minutes which says QE3 could be a way off. Weekly jobless claims falling to the lowest level in four years was a positive but there could be distortions in the number because of 4^th of July celebrations.

Our market will find it hard to spike higher today unless Asia can come up with some good news but at least this drifting lower makes good stocks cheaper, though many of the above stocks have remained popular.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Find out Simon Bond's 7 stocks with both yield and growth potential.

Published on: Friday, July 13, 2012

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