BOSTON ( TheStreet) -- Visa (V - Get Report), Kinder Morgan (KMP) and Duke Energy (DUK - Get Report) aren't the sexiest stocks, but they enable investors to diversify through slow-growth industries, says Larry Rosenthal, president of Financial Planning Services.
Rosenthal, a certified financial planner in Manassas, Va., says such a strategy generates yields that outpace those of Treasuries. At the same time, a basket of those types of stocks should provide growth potential and an inflation hedge.
|Larry Rosenthal, president of Financial Planning Services.|
"The main fight that the small retail investor has is keeping their money growing to outpace both taxes and inflation," says Rosenthal, whose firm oversees about $200 million. "If the economy expands and the market grows, it will create jobs and spur spending. With the position of monetary policy, we're going to have inflation again. That's where our hedging comes in, by betting on commodity-related stocks."
His all-equity approach looks to dividend stocks whose yields are sustainable over a 12-month range and favorable compared with the 10-year Treasury, which currently yields 2.47%. To hedge inflation, Rosenthal says stocks require a three- to five-year time horizon."If we do have a double dip, it will be a wonderful cushion for us in these holdings," Rosenthal says. "The Federal Reserve has basically said if the economy pulls back, they're ready with some more easing measures. That's an even better argument for some of our longer-term inflation hedges. We do think inflation is going to come. We just don't know when and by how much." When picking stocks for a portfolio, Rosenthal partners with Richard Krafcik, a fund manager at Stack Financial Group. Krafcik says he seeks out companies with wider margins than their competitors, which is an advantage if the economy weakens because they are better able to cut prices and sustain revenue growth. The all-equity approach has its share of risks, as stocks tend to be more volatile than bonds. Still, the portfolio has a lower beta than the S&P 500 -- it doesn't move in lock-step with the benchmark -- with a yield that outperforms Treasuries. Rosenthal also notes that while he likes the diversification across industries that this type of approach involves, it should only be one component of an overall portfolio. "Because we have a good amount of emerging markets and bonds in our portfolio, we try to get a blended mix," he says. Despite those risks, Rosenthal says investors with Financial Planning Services are watching their portfolios appreciate. "We really take a look at a number of indices to measure ourselves against, including the S&P 500," Rosenthal says. "We're pleased with our performance and so are our clients. It's all because we tend to look at a risk-adjusted performance. That means how much downside capture and upside capture are we getting." Rosenthal and Krafcik offer five stock picks for a diversified portfolio based on the investing theme of looking for companies in slow-growth industries, companies with yields outpacing Treasuries, and companies that act as a good hedge against inflation. These stocks are owned by some clients of Financial Planning Services and Rosenthal himself.
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