The Micro Portfolio

by The Compound Investor

The old barriers to entry keep crashing down in the investing world. I stumbled across the launch of Charles Schwab’s fractional share offering this morning – Schwab Stock Slices. Given the turbulent times, most of the site’s readers probably have more pressing concerns than this. That said, I can’t help but think that this is a very positive development, albeit a small one right now.

So, what the heck is Schwab Stock Slices? Put simply, you can now buy S&P 500 stocks in blocks as small as five bucks. The trades are commission-free, which I believe is now the norm with Schwab anyway, and you can buy up to ten slices at a time. My understanding is that automatically reinvesting cash dividends is also available.

This sounds great for the buy-and-hold crew. The thing that stands out the most? Custodial accounts. From my brief time browsing the Schwab site it looks like they have promoted this aspect very well. We know twenty bucks here and there isn’t going to make anyone rich quickly, but that’s just fine with a custodial account. You set one up for a minor, and you give them a big head start in the compounding game.

This strikes me as a potentially powerful game changer for lower-income families and young investors. As little as a spare five bucks gets them access to the ownership class, with a potential multi-decade head start for any children. What if you could rope in a couple of grandparents, as well as mom and dad? Imagine that adding up to a couple of hundred dollars per month, and then keeping that train rolling for a decade or two.

The Micro Portfolio

On that note, I figure it’s time to put my money where my writing is. I opened a zero-commission account for micro regular investing. Note, I’m not based in the States so it isn’t with Schwab, though it operates on much the same basis. It has a bit of a bucket shop feel to it, but I’m protected up to £85,000 (circa $105,000 at current exchange rates for US readers). That will be more than enough.

The first hundred bucks has gone in, and this is set to recur on a monthly basis. I have used that to purchase an equal weighted five-stock block consisting of Coca-Cola, PepsiCo, Disney, McDonald’s and Exxon Mobil. (Yeah, some of these might not be great picks right now, though the initial month’s contribution equates to a tiny fraction of the prospective total capital outlay).

I dislike the idea of selling in general, so this will be a hard buy-and-hold portfolio absent external factors (broker failure, forced position liquidation etc). These five starting names are perfect for that. (Note: I also plan on starting something a bit larger with Computershare/Equiniti, though I’m waiting on some funds from a property sale delayed by COVID-19. Hopefully this will be in place next month).

Anyway, here’s what I bought for that hundred dollars. First and foremost, some of the best brands and businesses on planet Earth – the result of which currently translates to around $3.86 in normalized trailing-twelve-month net income. That number already incorporates some COVID-19 impact and will likely go lower next quarter. Of that figure, around $3.48 got pumped out by way of dividend cash over the last twelve months.

If I keep at it for a couple of decades, then I’m looking at 240 months of contributions in total. That means circa $835 in additional annual income assuming absolutely nothing changes in real terms.

However, I have two other things on my side. Firstly, synthetic income growth via dividend reinvestment. What little income there is at the start will be left to accumulate, before being deployed as I see fit. Secondly, real-terms underlying earnings growth. There may be some short-term battering and bruising due to COVID-19, and that will depress retained earnings. I expect things will improve going forward. Because of these two, I also expect this micro portfolio to throw off some reasonable extra income given a couple of decades to run.

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2 comments

Dividend Diplomats June 5, 2020 - 1:02 am

Excellent idea and concept right here. It is great to see that brokerages are starting to bring back fractional share trading. You hit it spot on, this is truly removing the barriers to investing. Now, stock price is irrelevant. You can investing in any company for any amount (as long as it is above $5). How cool is that? The trend seems to be that Robinhood starts a trend and then the big brokerages replicate and follow through.

Bert

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The Compound Investor June 5, 2020 - 9:11 am

Yep, totally agree!

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