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Dividend Payers, Vanguard Wellington Top Readers' Lists of High-Conviction Holdings posters like holdings that show them the money, while others are taking a contrarian tack.

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If you're like many investors, your portfolio has a problem child or two--funds or stocks that consume a disproportionate share of your worries, even if the positions aren't large in size. The good news is that those securities are frequently counterbalanced by holdings in which you have the utmost confidence--you have a thesis, you've done your homework, and you're confident that the stock or fund will deliver a risk/return profile in line with your expectations.

This week, I asked participants in the HandsOn forum of Morningstar's Discuss boards to share their highest-conviction holdings. Recognizing that what's high-conviction for one investor might not be for another, I asked posters to construe the term in whatever way they saw fit. Predictably, the posts were all over the map: Sleep-at-night funds like  Vanguard Wellington (VWELX) received repeat mentions, but so did individual stocks, bond funds, and contrarian picks like  Fairholme (FAIRX)The complete thread is worth reading, whether you're in the market for anchor holdings or simply trolling for new investment ideas to research.

The Tried and True
In my original posting, I mentioned that a high-conviction idea "could be that mutual fund you rely on to generate reliable returns year in and year out." For many posters, that fund is the venerable Vanguard Wellington.

Sniper66 summed up the case for Wellington with this post: "It has a fairly consistent performance year over year (with the obvious exceptions like 2008), a good portfolio of large blue-chip value stocks, high-quality bonds, a nice dividend, and low expenses. I don't have to spend any time monitoring this fund." Armagh63 provided a list of the fund's positive attributes, including "stability," "low costs," "anxiety-free," and "a home for long-term expectations." 

Vangrothsap--and others--likes the fund's fairly low volatility, and also finds the fund's staying power to be extremely appealing. He wrote, "This fund has been around for 80-plus years. It has survived the 1929 crash, the Great Depression, World War II, the Cold War, and so on. Hundreds, if not thousands, of mutual funds (and exchange-traded funds) have collapsed, merged or gone under in that time. In short, this is a fund that has stood the test of time. It provides acceptable, stable returns which can even out a portfolio in good times and bad!"

Another Vanguard fund,  Dividend Growth (VDIGX), also received repeat mentions from our users. Stanglx7 enthused: "Since this fund had been converted from a utility fund in 2004 the risk/return profile is virtually unmatched. Low expenses, seasoned management team, and focusing on the sweet spot of investments (dividend growers) ensures future success."

Tomarcher, meanwhile, likes  Vanguard Wellesley Income (VWINX), a conservative-allocation fund. "If you want best in category returns over the long term, you can't beat Vanguard Wellesley Income for a core holding. I've tried and failed. Wellesley offers rock bottom expenses and a track record that is hard to match." ColonelDan concurred: "[Wellesley's] management team and track record since inception tells me it's a proven reliable winner through thick and thin and fits my retirement priorities perfectly."

But the thread wasn't just a Vanguard love-fest. A handful of tried and true Fidelity funds made posters' lists of high-conviction holdings. Peter5 cited  Fidelity Low-Priced Stock (FLPSX) as a top choice. "It's such a great long-term performer with a solid risk/return profile. I'll stick with [manager Joel Tillinghast] until he retires."  Fidelity Contrafund (FCNTX), another offering with an extremely long-tenured manager, also popped up on a few lists.

Other posters mentioned boutique-managed offerings in which they've placed their faith. Given its extremely strong recent performance,  Sequoia (SEQUX) was top-of-mind as a high-conviction pick for fund investors who have been lucky enough to own it;  Yacktman (YACKX) also appeared on many posters' lists as an easy sleep-at-night pick. LandOlake likes both Yacktman and  Permanent Portfolio (PRPFX), writing, "They always make the playoffs with a balanced offense and defense."  Jensen Quality Growth (JENSX) also received at least a few mentions.

For Arora1,  First Eagle Global (SGENX) epitomizes an all-weather, sleep-at-night pick. This poster wrote, "I bought this mutual fund in 1990 after watching Jean-Marie Eveillard on Louis Rukeyser's show. It has performed better than anything I have ever owned with much lower volatility. Eveillard is not managing the fund any longer but the fund still seems to be sticking to the same basic knitting."

The Contrarians
Showing an impressive level of tenacity in the wake of poor recent performance, several posters said that they're happy to hang tough with--and even add to--their high-conviction holdings.

Fairholme topped several posters' lists as a high-conviction idea, despite its recent travails. Zweb2011 wrote, "My highest-conviction holding is Fairholme. Simply being contrarian for sake of being contrarian. Also it was beaten down most in 2011 of all my holdings."

Vangrothsap is also thinking like a good contrarian. He views the recent drop in  Dodge & Cox International (DODFX) as a reason to add to his holdings in this high-conviction fund. "I have confidence in management, their investment selection approach, and their corporate culture. As a result, I view this drop in price as a buying opportunity for my Roth IRA!"

In a similarly contrarian mode, GeorgeBMac, and a few other posters, likes the Matthews funds, which focus on investing in Asia. With several of Matthews' China-focused offerings in his portfolio, GeorgeBMac is holding tight. "Even though they got crushed--when I look at their fundamentals, they still look like something I would buy. In fact, if I wasn't already overweight in them I would." 

The Asset Allocators
For other posters, low-cost index funds fit the bill as building blocks for a successful, well-diversified portfolio.

Rossinator wrote, "I have conviction in many of my holdings, but since I am a believer in Modern Portfolio Theory, my HIGHEST conviction holdings, hands down, are  Vanguard Total US Stock Market Index (VTI) and  Vanguard International Index (VEU)."

Darwinian is on the same page. "I am an asset allocator. If a high-conviction investment is defined as one I will never sell down, there is no such animal. If it is one I will never sell off, I have several. Since I am a value investor,  DFA US Small Cap Value (DFSVX),  DFA Emerging Markets Value (DFEVX),  DFA US Large Cap Value (DFLVX),  DFA International Value (DFIVX), and  DFA International Small Cap Value (DISVX) are highest, with  Vanguard Consumer Staples (VDC) close behind. I would not be at all surprised if I am still holding all of these, 20 years from now." 

The Income-Niks
Given that many users are closing in on retirement, it's not surprising that income-producing securities--both stocks and bonds--were high on many posters' lists.

Nuveen municipal-bond funds--both open- and closed-end--received mentions among posters. Lucasd6 likes the income that closed-end Nuveen Dividend Advantage Municipal (NAD) and  Nuveen Premium Income Muni (NPI) kick off. Petrus 1949, meanwhile, likes open-end  Nuveen Limited-Term Municipal Bond (FLTDX) and  T. Rowe Price Virginia Tax-Free Bond (PRVAX).

On the taxable bond side,  DoubleLine Total Return (DLTNX) and  Dodge & Cox Income (DODIX) showed up on some posters' lists of high-conviction holdings, but the most frequently mentioned bond fund was  Loomis Sayles Bond (LSBRX). Posters generally concurred that the fund had rewarded investors for the risks it courts. Paul_Small wrote, "Looking back at my portfolio, I find that the only investment that I have continuously held and added to for more than four years is Loomis Sales Bond. Dan Fuss and Kathleen Gaffney et al. have consistently earned about 7% annually for me despite net asset value variations."

The Stock-Pickers
Among income-focused investors, dividend-paying stocks also received repeat mentions as high-conviction favorites. Various Kinder Morgan companies received enthusiastic mentions. Incident51 stated the case as follows. "I own  Kinder Morgan Energy Partners (KMP) for my after tax holdings,  Kinder Morgan Management (KMR) for my pretax. Pipeline companies earn money no matter the price or source of oil or gas. And I have no doubt that liquid and gas fuels will need to be transported to power the US for the rest of my investing lifetime and beyond." Heyka enthused: "Richard Kinder is a genius."

Jeffsox9 has been a satisfied holder of  Philip Morris (PM), writing, "The stock has been phenomenal since I bought in at June 2010 (per the timely advice of a Morningstar article on dividend investing, I might add). The dividend feels good when you have no idea what the market will do this year."

 Abbott Laboratories (ABT) also received repeat mentions from dividend-hungry investors. Hope4Change likes the firm for its "solid pipeline and relatively less government exposure than other health-care stocks."  Johnson & Johnson (JNJ) is another favorite in the health-care sector. Poster m0638pbbaemc ticked off the following positive attributes: "It is an indispensable company, with a broad economic moat of size and geographical diversity, with a history of great management also." Chutney5640 concurred on J&J: "It's never up too much or down too much, it's just dependable."

Meanwhile, Molokoeo thinks that demographic trends should power strong demand for utilities stocks, with  Southern Companies (SO) a particular favorite. He writes, "Utilities in general are in the sweet spot right now, with interest rates low, the VIX [a volatility index] high, and dividends in vogue. In fact, utilities are feeling a little too much love lately and are getting over bought. Still, with baby boomers beginning to reach retirement age, demand for income-paying investments should only continue to grow. [Southern] is my favorite because of its footprint in retirement destination states--another baby boomer catalyst--and its strong relationship with regulators. By the numbers, Southern yields comfortably more than 4%, has a reasonable payout ratio, and has managed to raise its dividend for 10 years at a rate somewhat above inflation."

 General Electric (GE),  3M (MMM),  International Business Machines (IBM), and  ABB (ABB) were also cited as having attractive dividends as well as the potential for price appreciation.

Other posters noted that they've been happy holders of companies with long-term growth potential, especially technology stocks, even if dividends aren't a key attraction.  Apple (AAPL), not surprisingly, was frequently cited among posters. Danahan wrote, "I'd sell my golf clubs before selling that stock, at least until it hits $500." Montyh, whose portfolio consists primarily of dividend payers, is similarly enthusiastic. "The one non-dividend-paying stock I own is Apple. I believe the company has the corporate culture to continue to succeed in the future."

The Philosophers
Other posters were philosophical when naming their highest-conviction holdings. At least a few posters named cash. Despite meager yields, they like that it gives them the power to be opportunistic. Kayaker wrote, "With the market's reaction to whatever will occur in Europe and the election in this country, I have another large high conviction holding: Cash. I upped the amount of this holding during November and December with tax-loss sales so that I have some ready for the next big media and European government induced sell-off where I hope to buy a few things on my 'want to own' list."

Stockvapors agreed that cash is king. "After a bit of review, I discovered that my highest conviction is cash. Not great for yield but I am a firm believer in having a short term bucket of cash for current income and for those heart-pumping market dives that allow bottom-feeders like me to scoop up tempting values."

Finally, TOOOINTENSE, always thinking big, offered this bit of wisdom. "The highest conviction is not a holding. The highest conviction I have is not to be caught in 'conventional financial thinking.' If 2008-09 should have taught us anything, it is that conventional thinking will make you crazy, broke, or both. I try to always remember that the market can stay irrational longer than I can remain solvent. I always make money when I am 'outside the box'--especially when the box is going to the dump."

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.