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Why I think Soul Patts is the best passive investment idea on the ASX

More and more people are coming to the realisation that it’s better to invest in something passive like an index fund unless you understand financial concepts, have patience and can recognise an opportunity.

Passive investing works wonderfully in the United States, indeed Warren Buffett has recommended that ‘know-nothing’ investors should go for an index fund like iShares S&P 500 ETF (ASX: IVV) because it’s full of high quality companies and the holdings are very diverse.

The American share market is great because the big companies are all from different industries like technology, retail, financials, resources and so on. These companies are truly global, collectively they operate in nearly every country in the world, spreading the earnings risk.

The Australian share market doesn’t look so good in this regard. A lot of the ASX index’s weighting is devoted to either banks or resource stocks. An individual investor would come out with a more diversified portfolio if they chose 20 to 30 shares themselves.

For an Australian-focused investor, I think Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) is the best passive investment idea on the ASX.

It just unveiled its half-year report today. Regular profit attributable to members increased by 19.4%, the dividend was increased 4.5% and Soul Patts’ pre-tax net asset value increased by 16.5%.

I really like Soul Patts’ approach of taking ­long-term investment stakes in businesses like TPG Telecom Ltd (ASX: TPM) and Brickworks Limited (ASX: BKW). It doesn’t matter what happens over the next six months, Soul Patts plans to hold the shares of those companies for many years to come.

The investment conglomerate style of operating means that Soul Patts can enter and exit investments and industries as it sees fit. This is a key part of why index funds work so well, because the new blue chips on the block, such as Facebook, are included and the past-it businesses are kicked out. Soul Patts operates its investments well in this regard, meaning it could remain relevant for many decades to come, if not forever.

Most people want a rising dividend stream from their investments, if possible. Soul Patts has increased its half-year dividend every year for the past two decades, with no signs of it stopping. For this half-year report it only paid out 74.7% of its regular operating cash flows, which is a very sustainable ratio. The retained 25% will help the business grow the profit and dividend next year.

It has delivered returns better than the index over the past 10 and 15 years, although there’s no guarantee this will always be the case.

Foolish takeaway

Soul Patts may not deliver the biggest returns over the next decade, but I think it’s one of the lowest-risk options. Its dependable dividend and growing profit make it a top-quality bottom-drawer stock in my opinion, which is why it’s in my portfolio.

Another share I’m very happy to own is this top dividend stock, which is likely to deliver bigger returns than Soul Patts over the next two years.

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Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Brickworks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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