It’s my experience that every investment portfolio should contain a solid core of tested and trusted blue chip, dividend-paying stocks or stock funds. Over the long term, dividends have been critical to total return. From the end of 1929 through March 2014, reinvested dividends provided almost half of the S&P 500 Index’s total return, or a 9.4 percent annualized return versus a 5.2 percent return from price appreciation alone.* That being said, investors can potentially boost their portfolios by adding “satellites” to their cores consisting of possible future high growth sectors.
One sector I believe will exhibit extraordinary growth over the next five years is Cloud Computing. Cloud Computing is a new technology that uses the Internet and central remote servers to maintain data and applications. This type of computing allows businesses and individuals to use applications without installation and provides access to their files on any device with Internet access. Cloud Computing lowers business startup and ongoing costs, which can assist with future growth.
According to Gartner Group, Cloud Computing spending is expected to grow at an estimated 22 percent compounded rate between now and 2018. That would more than double Cloud Computing spending over the next three years to $250 billion. Having exposure to this kind of growth in your portfolio could add real snap to your overall returns.
After lagging over the past 12 months, another sector that could provide exceptional growth is the energy industry. With oil prices down nearly 50 percent over the last year**, many energy companies, especially those involved in fracking and oil equipment and services, have taken a beating. Oil prices have firmed up and I believe they will end the year higher. Even though there is a current oversupply of oil, that oversupply is unlikely to last.
Now, here’s a word of caution when looking at energy investments: Not every area in the energy sector will recover at the same rate. I predict that some companies in the fracking business will not be around at the end of this year. Make sure to do your homework with diligence or seek the advice of someone who understands investing in this the sector.
In this environment of near zero interest rates, one area in the energy field that income-oriented investors may want to investigate is the Master Limited Partnership (MLP) space. Energy MLPs regularly pay income streams of 4 to 7 percent or more. Again, homework is necessary because there are more than 100 energy MLPs, and they are not all created equal. Some will outperform this year while others will flounder.
On a final note, make sure your investments are diversified, that you have a sell discipline in place, and that your overall portfolio is designed to meet your goals.
*Loomis Sayles
** WSJ
All views expressed are those of the author and do not necessarily represent the views of Moors & Cabot, Inc. Master limited partnerships may have complex tax reporting. Please consult with your tax advisor for additional information.
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