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Berko: Selecting forever investments

By Malcolm Berko

Published: November 10, 2018, 6:00am

Dear Mr. Berko: I’d like to thank you. We used the pro bono lawyer you recommended in 2012. It took a long time to settle, but he got our 16-year-old son more than we expected — about $140,000 — and our only cost was his firm’s expenses, about $17,000.

We don’t want to buy mutual funds or annuities, so could you recommend a portfolio of A-rated stocks that pay good dividends and stocks he could own for his entire life without having to watch them?

— SG, Cleveland

Dear SG: “Pro bono” is a Latin term for professional work undertaken voluntarily and without payment. Most big law firms accept qualified legal cases for people who can’t afford their services. It’s considered a payback or a form of community service. And the firm you used considers pro bono work a sacrament. I’m pleased that my recommendation helped you.

But the answer to your last question is “no!”

In response to a similar question 30 years ago, I might have recommended such stalwarts as Polaroid, U.S. Steel, Kodak, General Electric, Xerox, Sears, Lehman Brothers, Texaco, WorldCom, Pan Am, J.C. Penney and Circuit City. There’ve been three industrial “evolutions” that have shaped our modern society, and today we are on the brink of the Fourth Industrial Revolution. It’s a fusion of technologies, the likes of which few of us can imagine. It’s a blurring of lines among the physical, digital and biological spheres of knowledge, and it’s happening at exponential speeds, such that thousands of today’s businesses could become obsolete in the blink of an eye. There will be massive, world-changing innovations in the coming dozen years that may make “Star Trek’s” mind-blowing technologies look antiquated.

I can recommend International Business Machines (IBM-$120) and its 5.2 percent dividend, which has increased annually for 25 years. I like Royal Dutch Shell (RDSA-$27) and its 5.6 percent dividend, which has a good history of increases. And I’d have to recommend AbbVie (ABBV-$82), with a 4.7 percent dividend, AT&T (T-$30.50), with a 6.7 percent dividend, and Verizon Communications (VZ-$57), yielding 4.3 percent. Each of those companies has a fine long-term dividend growth record. And I’d have to add Southern Co. (SO-$45), with a dividend yield of 5.3 percent, and Kraft Heinz (KHC-$53), with a 4.6 percent dividend yield. All of the above companies are rated A to A++ by Value Line. However, each of those classy companies could be zapped tomorrow by technological lightning just like Polaroid, Sears and Xerox.

Frankly, even a classy, carefully chosen portfolio of A-rated stocks can lose its mojo. In the past dozen years, the Dow Jones industrial average has performed better than T, RDSA, VZ, SO and even IBM. And so have hundreds of no-load mutual funds, including Vanguard PrimeCap Fund (VPMCX-$137), which uses a growth-oriented multimanager approach and has a low 0.39 percent expense ratio. Its one-, three- five- and 10-year records are all above 13.5 percent. Vanguard Mid-Cap Index Fund (VIMSX-$42) has historically outperformed large-cap stocks by a wide margin and has a 0.18 percent expense ratio. Its one-, three-, five- and 10-year performance records are above 11 percent. Then consider Fidelity Contrafund (FCNTX-$12.50), a superb growth fund managed by Will Danoff since 1990. It has a 0.74 percent expense ratio, and its one-, three-, five- and 10-year performance records are all above 13 percent. Finally, Fidelity OTC (FOCPX-$11), with a 0.81 percent expense ratio, is high-risk but high-performance, too. Its one-, three-, five- and 10-year performance statistics are all over 17.5 percent.

I recommend that you invest an equal share of all of that money in the above four funds. But if you must own common stocks, then invest only $25,000 in each of those mutual funds and put an equal share of the remaining $40,000 in the above stocks. And remember to reinvest the dividends.

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