The Basic Needs Portfolio

The Basic Needs Portfolio

In May, I announced my intention to create a portfolio that embodied life's basic needs. Understandably, many of the truly basic needs in our everyday lives have transcended far beyond just the need for water and shelter. To that end, over a period of 10 weeks I detailed 10 diverse companies that I think will outperform the broad-based S&P 500 over a three-year period because of their ability to outperform in both bull and bear markets, and command incredible pricing power in nearly any economic environment.

If you'd like a closer look at what my reasoning was behind each selection, you can do so by clicking on any, or all, of the following portfolio components:

Let's look at how our portfolio of basic-needs stocks fared this week.


Cost Basis


Total Value


Waste Management










NextEra Energy















Select Medical










American Water Works





Procter & Gamble





AvalonBay Communities







Dividends receivable


Total commission


Original investment


S&P 500 performance


Performance relative to S&P 500


Sources: Yahoo! Finance, author's calculations.

It was another record-setting week for the S&P 500, which is somewhat odd since we're in between earnings season for the second and third quarters, and earnings growth is what really drives stocks higher. Don't fret, though, as we had plenty of dividend news to keep us busy (what's new, right?) as well as a few individual stories which placed some of our portfolio components in good shape for the long term.

Show me the money!
Payment processing facilitator, and top portfolio performer, MasterCard announced on Tuesday that it will keep its dividend steady and pay $0.60 a share on Nov. 8 to shareholders on record as of Oct. 9. MasterCard is our weakest link on the dividend front by a mile, with just a 0.3% yield, but it also offers the greatest growth potential, with $5.1 billion in cash and no debt. Also noteworthy, MasterCard and Visa found out at the end of the week that the Federal Reserve's appeal of debit-cap fees will not remove the current cap on those fees (which stands at about $0.21 per transaction) during the appeals process. With Visa holding a much larger share of the U.S. debit market, this isn't a big deal for MasterCard.

But, the only thing we love more than dividend announcement is dividend payments! On Friday we collected $0.365 per share from refuse collector and recycling company Waste Management and added to our already impressive dividends receivable after less than two months. Although metal prices for its recycling operations haven't been favorable, Waste Management offers trash collection services, which are an absolute necessity for practically every homeowner. And if you recall, the whole purpose of this portfolio is to pick companies that generate positive cash flow in any economic environment!

Other news
Planning for the future was a big theme this week when it came to individual stories. Ford on Thursday announced plans to spend about $685 million on upgrading an assembly plant in Ontario. According to the press release, Ford plans to boost production at the plant where its Ford Edge and Lincoln MKX are made, in order to keep up with growing demand for its more fuel-efficient vehicles, and so it can shift production more easily to meet changing consumer demand. Even though auto sales in North America have rebounded in a big way, carmakers like Ford are always looking for ways to improve margins and reduce costs. This is one case where spending the money now should help reduce its future costs and improve margins.

Residential real estate investment trust AvalonBay Communities on Monday announced that it will offer $400 million in debt, which the company would use to pay down its existing $1.3 billion unsecured revolving credit line, as well as for general corporate purposes and potentially acquisitions. With interest rates moving higher, AvalonBay would be expected to enjoy excellent rental pricing power as higher mortgage rates drive prospective buyers back into renting. Conversely, higher rates mean potentially higher interest expense on its revolving line of credit. While debt is not always the answer, in this case AvalonBay is making the smarter move should interest rates continue to move higher.

Finally, NextEra Energy announced that it will sell $500 million of equity units to Citigroup, Credit Suisse, and Morgan Stanley. Each equity unit will consist of a contract to purchase NextEra common stock in the future, as well as a 5% undivided beneficial ownership interest in a NextEra Energy Capital Holdings debenture with a 2018 maturity date and a yield of nearly 5.8%. While NextEra didn't exactly say what it planned to do with the funds, it seems likely that they could be used to pay down some of NextEra's debt and to fund new alternative energy products.

Back to basics
Despite being a record-breaking week that saw the S&P 500 hit a new all-time high, this basic needs portfolio again did its job. Between dividends received and price appreciation it outperformed the S&P 500 for a second straight week by a marginal 0.1%. So far this portfolio has tended to move in tandem with the S&P 500 rather than separating itself, but we also have to remember it's been only a few weeks. Over the long run I suspect these cash flow divas will outperform in nearly any economic environment.

Check back next week for the latest update on this portfolio and its 10 components.

Can dividends make you rich?
If there's one thing you'll notice about basic-needs stocks, it's that most pay a dividend -- and dividend stocks can make you rich. It's as simple as that. While they don't garner the notability of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to
rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends, Ford, Intel, MasterCard, Visa, and Waste Management. It also owns shares of Citigroup and recommends Chevron and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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