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Home > Investing > MONEY PROS Index Fund Challenge: My Picks!

MONEY PROS Index Fund Challenge: My Picks!

December 22nd, 2011 Leave a comment Go to comments

I’ve joined the MONEY PROS Index Fund Challenge 2012! Thanks to 101centavos and all the bloggers at the MoneyPros Index for hosting this competition. Check out all the participants and their stock picks here.

Each participant selects (3) stocks which will be tracked in a portfolio. All dividends will automatically invested when they are earned.

I’ve selected (3) stocks that will make money in 2012. Two of them I can tell you will a fairly high degree of certainty how much they will make. The third one will most certainly increase its already high dividend, but will the market bid the price up?

Here are my picks and why I have selected them. I had two goals with this portfolio:

  • Demonstrate that you can earn 7-8% without taking on significant capital risk (loss of principal).
  • Demonstrate how you can potentially earn 15-20% per year with an investment that takes on capital risk.

Realty Income Corp (Public, NYSE:O-D)

This stock will most certainly earn 7% next year. I can say this because it’s a preferred stock. At it’s current price of $26.5, it will pay a coupon of 7%, paid monthly. Preferred stocks are bonds of a company that trade on the stock exchange, using their own symbol. Since corporate bonds typically trade by their CUSIP (an SEC registration number) and these are treated as such by brokers you might find that the exact stock symbol from your broker will vary based on their own whim (Google has it as above, O-D otherwise know as the Realty Income D preferred).

Realty Income is an exceptionally well managed company. They have been around for 42 years (combining their years as a private company with the 17 years as a publicly traded company). They have never missed a monthly dividend payment over that time nor has their real estate occupancy rate gone below 96%.

This bond is very simple. Realty Income issued this bond to buy real estate under long term triple net contracts. When they collect rent reach month, they pay you, the bondholder.

Health Care REIT, Inc. (Public, NYSE:HCN-D)

OK, this one is really gonna get your juices going!. Health Care REIT (HCN) invests in health care industry properties. It has an excellent long term management record. This again isn’t the company stock, but I have selected one of their preferreds that will pay you 7.7%, paid quarterly. This one is known as the Health Care REIT D preferred, listed as HCN-D on Google Finance.

Totally boring, but you will make money!

Kinder Morgan Inc (Public, NYSE:KMI)

Kinder Morgan is the general partner that manages an extensive network of energy transportation assets in the U.S. (pipelines). OK, if you haven’t fallen asleep yet, this one will probably do it! Look, making money is exciting, do you care what it is? I don’t. I’m gonna tell you how you will make money in this one.

Here’s why I selected this one: I believe that this investment can beat the preferreds above by a big margin. If I didn’t think so, I would just put my money in the two preferreds above and be done with it. This is how you should invest, take the easy money (as above) unless you can demonstrate how some other investment will make you more money on a risk adjusted basis. (In economics they call this ‘opportunity cost’).

KMI currently pays a 4% dividend. They are projecting that this dividend will increase about 13% over the next 5 years. I talk about a return model here, but in summary you can get to 20% return using this equation:

Return(20%) = Dividend(4%) + Dividend Growth (13%) + Dividend Reinvestment(2-3%).

Admittedly, this formula really will work over multiple years, I wouldn’t necessarily expect that the company will return 20% next year. You never know.

OK, any company can tell you how much they will grow. However, Kinder has been delivering the goods. Take a look at this chart of earnings versus stock price over the past 15 years. Analysts follow what companies tell them, when the company delivers based upon analysts estimates the stock price goes up! This is the way the game works.

Image courtesy of Morningstar.

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