Growth and income:
These are two of the main portfolio styles that investors tend to identify with. Many younger investors like high growth tech stocks, while older investors tend to prefer dividend stocks that bring in consistent income.
Truthfully, there is no fundamental reason to choose between growth and income. The fundamental value of a stock is its future cash flows, discounted at an appropriate opportunity cost (usually the treasury yield plus a risk premium). In this sense, neither capital gains nor dividends are intrinsically relevant, it’s what you get per dollar invested that matters. With growth stocks, your return usually comes in the form of capital gains; with dividend stocks, it usually comes in the form of dividends, with minor capital gains mixed in. The overall return can come from either or both.
It’s for this reason I built my portfolio to have the potential for both dividends and growth. Since I started buying stocks, I’ve found growth stocks that seemed undervalued compared to their potential future earnings, and dividend stocks that seemed undervalued compared to their current dividends. In both cases, I bought if the deal looked good enough. In this article I will reveal my entire 10 stock portfolio that was built to maximize dividends AND growth.
The Portfolio Revealed
STOCK |
RANK |
WEIGHTING |
YIELD |
CATEGORY |
Bank of America (BAC) |
1 |
14.36% |
2.5% |
Mixed |
Google (GOOG) |
2 |
14.3% |
0% |
Growth |
Oaktree Specialty Lending (OCSL) |
3 |
11.72% |
11.3% |
Income |
Brookfield (BN)(BN:CA) |
4 |
9.75% |
0.8% |
Mixed |
Berkshire Hathaway (BRK.B) |
5 |
11.71% |
0% |
Growth |
Alibaba (BABA) |
6 |
10.5% |
1.3% |
Growth |
Postal Savings Bank of China (OTCPK:PSTVY) |
7 |
10.1% |
7.2% |
Income |
PDD Holdings (PDD) |
8 |
9.61% |
0% |
Growth |
TD Bank (TD)(TD:CA) |
9 |
5.4% |
5% |
Income |
JD (JD) |
10 |
2.42% |
2.5% |
Mixed |
As you can see, my portfolio is heavier on dividend stocks than the S&P 500 is. However, it isn’t exactly a dividend portfolio; apart from PSBKF, OCSL and TD, the dividend stocks have relatively low yields.
In addition to the names above, I also have a few index funds. These include the Vanguard S&P 500 ETF (VOO), the Vanguard All-World Ex-US ETF (VEU) and the Vanguard Financials ETF (VFH). The vanguard financials fund has a bit of yield, the other two are pretty much standard broad market index funds. I will leave these funds out of the discussion for the most part, because the purpose of this article is to discuss individual stocks. So, let’s move on to the analysis of my top holdings.
Bank of America
Bank of America is a bank stock that I accumulated mainly in late 2022, then in 2023 during the banking crisis and the Fall treasury yield panic. I initially started buying at $32, then at $29 in late 2022, then around $26 during the banking crisis, then finally at $25.5 at the lows for the year. The stock trades for $37.6 today, meaning that these investments have paid off for me.
Why do I like Bank of America stock so much?
Truthfully, I liked it in the past because of the dirt cheap prices you used to be able to get it at. At many times in 2023 you could buy it for eight times earnings and 0.8 times book value! Today, it’s much more expensive. Though I’m not selling, I’m not deploying fresh money into the stock either.
At today’s prices, BAC trades at:
-
12 times earnings.
-
3.16 times sales.
-
1.1 times book (this ratio rises to about 1.6 if you adjust the bond portfolio to fair value).
-
6.5 times operating cash flow.
This might appear cheap, but it’s not that cheap for a bank. Investors usually demand low prices for bank shares because they are highly leveraged and face a lot of tail risk. 12 times earnings is almost 20% higher than the S&P 500 bank index, which trades at 10.5 times forward earnings.
Another issue for Bank of America pertains to balance sheet health. The bank has $100 billion worth of unrealized losses on its balance sheet, which means its “real” book value is much less than reported. The bank’s liquidity coverage (1.2) is pretty good even after you subtract these unrealized losses, though, so I don’t see them as anything to panic about.
Alphabet, better known as Google, is a very influential tech company which has a whopping 9 products with more than a billion users each. Google has a wide moat in internet search, with a 91.3% market share. It also has the leading long-form video app (YouTube), the most popular email service (Gmail), the most widely used smartphone operating system (Android OS), and the most popular office suite (Google suite). In some cases, Google products that lead in total user counts are behind on sales (for example, Android and Google Suite are behind IOS and Office 365 in terms of revenue generated), but Google is generally in second place by revenue in these categories, so it’s got a strong overall market position. I haven’t even mentioned Google Cloud, which is not as big as AWS and Azure, but is growing at a rapid pace.
Despite the myriad advantages it possesses, Google is among the cheapest big tech stocks right now. Below you will see Google’s valuation multiples (courtesy of Seeking Alpha Quant) as well as valuation multiples for various comparable stocks
|
Apple (AAPL) |
Meta Platforms (META) |
Microsoft (MSFT) |
|
P/E |
26.5 |
26 |
35 |
38 |
Price/sales |
6.3 |
6.8 |
8.4 |
13.9 |
Price/book |
6.7 |
35 |
8.8 |
13.2 |
Price/cash flow |
18.6 |
22.5 |
18.9 |
30.8 |
As you can see, Google is the cheapest of the bunch, having lower multiples than almost every similar-sized tech stock except Apple, which scores a very small win on the P/E ratio.
Google also has a pristine balance sheet with a 2.1 current ratio and a 0.105 debt/equity ratio. There are some risks related to anti-trust investigations, but Google has faced such investigations before, and the resulting fines/settlement were not enough to materially impact the stock. Microsoft’s big AI investments have occasionally been mentioned as a risk factor for Google, but so far, have not impacted its market share in any of its verticals.
Brookfield
Brookfield is a Canadian financial conglomerate best known for its listed partnerships and funds. I bought BN stock after researching the stock for several years. I initially found the company hard to understand. It has many partially owned subsidiaries that are accounted for using different accounting methods. This makes it somewhat tricky to find out what the company actually owns and how much it’s worth.
After a very long period of time researching Brookfield, I found that the company traded at a significant discount to the net asset value of its holdings. The company’s stakes in its partnerships are worth about $68 per share in themselves, and on top of that, the company also owns a 75% stake in Brookfield Asset Management (BAM)(BAM:CA) which is worth $70.41 per BN share (BAM’s $23.47 in book value per share times three). There is some debt to be netted against all that but only $12 billion of it is at the corporate level; some of the asset-specific debt is double-counted due to BN’s choice to use the full consolidation method to account for its subsidiaries. So there is a case to be made here that BN is trading below NAV or “true” book value, whichever you prefer to call it.
Oaktree Specialty Lending
Last but not least, we have Oaktree Specialty Lending. Oaktree Specialty Lending is a business development corporation (BDC) that lends money to companies experiencing financial difficulty. Its top five loan categories by sector are:
-
Software.
-
Healthcare.
-
Specialty retail.
-
Real estate.
-
Professional services.
Its loans by ranking are:
-
First lien (78%).
-
Second lien (8%).
-
Unsecured (3%).
-
Equity (5%).
-
Joint ventures (6%).
So 86% of OCSL’s investments are first or second lien, meaning secured by collateral. Specifically, Oaktree has first pick at 78% of its portfolio companies’ assets, and the second-highest claim on a further 8%. So while the company is loaning money to riskier-than-average companies, it has good recourse.
OCSL scores “As” on both growth and value in Seeking Alpha Quant. You can see some selected growth and value metrics in the table below:
Rev growth. |
43% |
Earnings growth. |
2,969% |
Free cash flow growth. |
302% |
Total assets growth. |
18% |
P/E |
8 |
Price/sales |
3.73 |
Price/book |
1.02 |
As you can see, OCSL is much cheaper than most stocks these days, while also growing rapidly. It’s a pretty attractive combination of characteristics. Finally, OCSL has an 11.3% dividend yield, making it the highest yielding stock in my portfolio.
The Overall Portfolio
Having looked at my top four holdings, I can now move on to a discussion of my overall portfolio strategy.
As you can see by looking at the table I started this article with, my portfolio is very overweight financials and foreign tech. This wasn’t exactly by design–I used to own a lot of U.S. tech, but I sold all of it off during the 2023/2024 bull market in tech stocks. Some stocks I owned but no longer own include Apple, Meta, Microsoft, and Adobe (ADBE). I primarily hold financials and Chinese tech today because these sectors are comparatively cheap, the former trading at a 10.5 forward P/E ratio and the latter at single digit trailing and forward P/E ratios.
One goal I had in designing my portfolio was to take advantage of multiple interest rate scenarios. Many think interest rates will come down this year, but on the other hand, oil prices are rising, which tends to make inflation go up. I have hedged against this risk with holdings that benefit in different rate scenarios. Highly leveraged stocks like BN and growth stocks like Google should benefit from rates going down. Financials with mostly variable rate loans, such as OCSL, should benefit when rates go up. Bank of America gains profitability when rates go up, but its balance sheet improves when rates go down (the unrealized losses get smaller). So, it has ways to gain from both scenarios. Chinese tech, being foreign, should be relatively uncorrelated with U.S. monetary policy one way or the other.
By building my portfolio in the way I have described, I’ve achieved a portfolio yield around 4%, while still having plenty of exposure to growth stocks like Google and PDD. Every quarter, I get a significant amount of dividends, and most of my stocks have seen substantial gains over my holding period. Overall, I’m happy with this result.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.