Tollbooth Stocks for a Tollbooth Portfolio

Dividend Earner

Dividend Earner

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4 min read Affiliate Disclosure

While I am a dividend growth investor, my stock selection process has everything to do with finding the tollbooth stocks or more specifically subscription business model. 

Why is that? Subscription is the easiest model to forecast for businesses and you can build a relationship with the customers more easily which greatly helps improve the products and services offered.

Many winning portfolios will have one or many of those companies as major holdings. The business analysis for those portfolios will follow stringent guidelines to select those companies.

What Is a Tollbooth Stock?

The non-digital way to look at subscriptions is done by using the tollbooth analogy. A tollbooth can also be predictable and profitable. You can increase the fees as your costs go up to maintain the same profit ratio.

The tollbooth stocks and subscription businesses generate recurring revenue with consistency and when managed properly, the businesses can either optimize their costs for a higher profit margin or they can increase the end user price.

Unlike regular businesses where they simply have to get more and more customers, subscription businesses can focus on value add and staying competitive to generate higher profits.

Look at how Netflix operates vs car manufacturers; one is counting the members paying monthly and the other is counting sales. The 2 models have very different impacts in forecasting financials.

In the fall of 2019, I heard Jim Cramer discuss on his Mad Money podcast how car companies are learning that we drive more but buy fewer vehicles. Due to the cars lasting longer, consumers don’t buy new vehicles as often.

As such, the concept of subscription for vehicles is being discussed within the car industry and, as it happens, Porsche is offering a subscription through its Porsche Passport service. The concept goes back to how much one is spending on a car annually when you consider depreciation and all. The data is all there for the car manufacturer to establish an appropriate pricing strategy.

Identifying 7 Business Segments

When you merge the tollbooth concept with the necessity of life, you end up with a really strong business model. The easiest companies to classify are the utilities. The next ones on the list are the Canadian banks and the telecom industry.

As you can see, those have some regulations in place to avoid gauging customers since they have a type of monopoly on the business. They are also referred to as oligopolies when a few businesses share a monopoly.

I have tried to look at businesses differently from the conventional models. The financial industry has classified companies a certain way within a sector and industry to compare more easily and assess trends with similar businesses.

While that is an important classification, revenue and growth forecasting is easier with the first 3 segments outlined below.

Using the segments below requires investors to understand how the business is collecting revenue. No metrics can tell you how it operates, you have to read up on it.

For example, until Disney started Disney+, it was in the consumable-discretionary segment but now with Disney+, it has entered the subscription segment.

Here are the segments I use to categorize each business.

  • Subscription
  • Tollbooth – Regulated
  • Tollbooth – Unregulated
  • Consumable – Necessities
  • Consumable – Discretionary
  • Durable
  • Intermediate

Before we go further, I love tollbooth stocks or subscription stocks but not all of them provide growth and profit. You still need to do more research.

Take REITs as an example, they are a tollbooth stock but have limited growth and limited distribution growth.

Sure, you get regular rent but oftentimes, rent increases is controlled or commercial rent is negotiated. Customers also don’t just magically increase like they can for online businesses. Just a word of caution as you read on.

Subscription

To fit into the tollbooth stocks category, an important part of the business must be driven by a subscription model. It has to be a service that users or companies opt-in willingly.

Take cloud computing or software services as an example. Newspapers and magazines would fall in here as well but it’s highly competitive.

The music industry was re-invented with streaming by Spotify and Apple also has a service.

In fact, Apple is re-investing a lot of the old business models into new subscription services such as Apple Music, News+ and TV+. I also now file The Walt Disney Company in this category with Disney+. The streaming service should become their largest revenue contributor over time.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NASDAQ:MSFT MSFT Microsoft Technology Software - Infrastructure 68.04 420.55 3,124.87 38.03 38.03 11.06 0.7100 25.7400 4 3.00 11.3800 10 6 Subscription YES YES NO NO USA 1 11 91 A Mega Cap
NASDAQ:AAPL AAPL Apple Technology Consumer Electronics 72.83 188.85 2,916.20 29.38 29.38 6.42 0.5100 14.9200 4 0.96 7.1700 9 6 Subscription YES NO NO NO USA 1 11 31 A Mega Cap
NASDAQ:COST COST Costco Consumer Defensive Discount Stores 59.47 723.40 320.99 49.33 49.33 14.67 0.5600 26.8800 4 4.08 12.9100 10 6 Subscription YES YES NO NO USA 1 4 34 B Mega Cap
NYSE:ORCL ORCL Oracle Corporation Technology Software - Infrastructure 62.61 116.64 320.63 32.25 32.25 5.42 1.3700 40.7900 4 1.60 16.2400 7 6 Subscription NO NO NO NO USA 1 11 91 B Mega Cap
NYSE:ACN ACN Accenture plc Technology Information Technology Services 68.58 371.67 247.72 34.44 34.44 11.86 1.3900 42.5700 4 5.16 11.0600 9 6 Subscription YES YES NO NO USA 1 11 53 A Mega Cap

Tollbooth – Regulated

Consumers are generally required to use the service and pay a monthly fee. However, as a necessary service, fee increases are regulated and usually require approval by a governing body. This segment usually represents the utilities for your home.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
TSE:BCE BCE BCE Communication Services Telecommunication Services 50.91 50.52 46.09 20.74 20.74 3.21 7.9000 117.1900 4 3.99 13.0000 6 1 Tollbooth - Regulated NO YES YES NO Canada 1 2 99 B Large Cap
TSE:T T Telus Communication Services Telecommunication Services 71.94 23.64 34.59 42.65 42.65 0.95 6.3600 251.0100 4 1.50 12.7600 7 7 Tollbooth - Regulated NO YES YES NO Canada 1 2 99 A Large Cap
TSE:RCI.B RCI.B Rogers Communication Services Telecommunication Services 36.15 61.38 32.57 37.28 37.28 4.57 3.2600 91.9900 4 2.00 3.2600 1 5 Tollbooth - Regulated NO NO NO NO Canada 1 2 99 D Large Cap
TSE:FTS FTS Fortis Utilities Utilities - Regulated Electric 66.31 52.56 25.67 17.03 17.03 3.09 4.4900 74.8300 4 2.36 9.8600 6 6 Tollbooth - Regulated NO YES YES NO Canada 1 12 106 A Large Cap
TSE:H H Hydro One Utilities Utilities - Regulated Electric 41.29 40.06 24.00 22.24 22.24 1.80 2.9600 63.7700 4 1.19 7.8800 4 5 Tollbooth - Regulated NO NO YES NO Canada 1 12 106 C Large Cap

Tollbooth – Unregulated

Banks are a tollbooth but they are somewhat unregulated. The account fees or any other fees are set competitively but since they have an oligopoly, they don’t tend to undercut each other much.

While telecoms are semi-regulated, I would say the complete suite of offerings puts them in the unregulated space. Oligopoly businesses, such as the railway or credit card companies, will have a business that can look like a tollbooth.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NYSE:V V Visa Financial Services Credit Services 63.85 276.43 555.34 31.81 31.81 8.99 0.7500 21.8400 4 2.08 15.2200 10 6 Tollbooth - Unregulated YES YES NO NO USA 1 7 32 B Mega Cap
NYSE:JPM JPM JP Morgan Chase Financial Services Banks - Diversified 70.88 175.01 505.96 10.79 10.79 16.84 2.4000 18.8300 4 4.20 7.9700 8 7 Tollbooth - Unregulated YES NO NO NO USA 1 7 21 A Mega Cap
NYSE:UNH UNH UnitedHealth Group Incorporated Healthcare Healthcare Plans 78.97 518.22 479.31 21.73 21.73 25.12 1.4500 22.4400 4 7.52 17.0800 9 7 Tollbooth - Unregulated YES NO NO NO USA 1 8 49 A Mega Cap
NYSE:MA MA Master Card Financial Services Credit Services 62.53 457.88 427.66 38.70 38.70 12.26 0.5800 14.4300 4 2.64 12.7100 10 6 Tollbooth - Unregulated YES NO NO NO USA 1 7 32 B Mega Cap
NYSE:XOM XOM Exxon Mobile Corp Energy Oil & Gas Integrated 69.07 101.77 404.13 11.46 11.46 9.52 3.7300 30.8300 4 3.80 4.8900 7 8 Tollbooth - Unregulated NO YES YES NO USA 1 5 70 A Mega Cap

Consumable – Necessities

This segment represents medicine, toilet necessities, and cleaning products to name a few. Food also falls in this category as we need it to survive and stay healthy.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NYSE:LLY LLY Lilly Healthcare Drug Manufacturers - General 42.12 740.16 702.64 127.60 127.60 6.32 0.7000 58.2000 4 5.20 7.8800 6 5 Consumable - Necessities NO NO NO NO USA 1 8 35 C Mega Cap
NYSE:JNJ JNJ Johnson & Johnson Healthcare Drug Manufacturers - General 73.66 156.76 377.36 29.66 29.66 10.43 3.0400 64.7500 4 4.76 8.9100 7 8 Consumable - Necessities NO YES YES YES USA 1 8 35 A Mega Cap
NYSE:PG PG Procter & Gamble Consumer Defensive Household & Personal Products 60.34 157.42 370.41 26.36 26.36 6.41 2.3900 60.9800 4 3.76 7.7700 7 7 Consumable - Necessities NO YES YES YES USA 1 4 51 B Mega Cap
NYSE:MRK MRK Merck & Co., Inc. Healthcare Drug Manufacturers - General 43.49 125.45 317.89 918.37 918.37 1.50 2.4600 1531.5100 4 3.08 7.6300 6 4 Consumable - Necessities NO NO NO NO USA 1 8 35 C Mega Cap
NYSE:ABBV ABBV AbbVie Inc Healthcare Drug Manufacturers - General 47.82 174.08 307.34 47.76 47.76 11.11 3.5600 0.0000 4 6.20 4.4800 5 5 Consumable - Necessities NO NO YES NO USA 1 8 35 C Mega Cap

Consumable – Discretionary

This segment represents the businesses that provide products that we consume such as clothes or any other items that are consumed by consumers (not businesses).

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NYSE:WMT WMT Walmart Consumer Defensive Discount Stores 50.60 169.28 455.74 28.10 28.10 6.55 1.3500 36.5000 4 2.28 3.2000 6 7 Consumable - Discretionary NO YES YES NO USA 1 4 34 B Mega Cap
NYSE:HD HD Home Depot Inc. Industrials Home Improvement Retail 75.93 363.15 361.43 23.29 23.29 15.58 2.3000 52.4500 4 8.36 13.1500 9 6 Consumable - Discretionary YES NO NO NO USA 1 9 50 A Mega Cap
NYSE:KO KO Coca-Cola Consumer Defensive Beverages - Non-Alcoholic 67.28 59.56 257.50 24.01 24.01 2.65 3.0900 73.0700 4 1.84 6.3200 6 8 Consumable - Discretionary NO YES YES YES USA 1 4 23 A Mega Cap
NASDAQ:PEP PEP Pepsi Co Consumer Defensive Beverages - Non-Alcoholic 64.37 167.67 230.52 27.98 27.98 7.62 3.0200 0.0000 4 5.06 9.1000 8 5 Consumable - Discretionary NO YES YES NO USA 1 4 23 B Mega Cap
NYSE:MCD MCD McDonald Consumer Cyclical Restaurants 63.49 289.47 209.96 25.03 25.03 11.94 2.3100 39.2600 4 6.68 8.4700 6 7 Consumable - Discretionary NO YES YES NO USA 1 3 87 B Mega Cap

Durable

Growth from this classification comes from economic growth in my opinion. Most consumptions are needed to require increased production which drives growth for durables products and factories generating those products.

Without growth, no new towers are needed and no new bridges. Infrastructure can reuse what exists instead of creating new roads or buses.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NASDAQ:NVDA NVDA NVIDIA Corporation Technology Semiconductors 38.60 721.33 1,781.69 95.24 95.24 8.69 0.0200 2.0900 4 0.16 0.0200 5 3 Durable NO NO NO NO USA 1 11 88 D Mega Cap
NASDAQ:AVGO AVGO Broadcom Inc. Technology Semiconductors 74.18 1283.44 600.83 38.97 38.97 42.25 1.6400 54.2900 4 21.00 16.3300 10 7 Durable YES NO NO NO USA 1 11 88 A Mega Cap
NASDAQ:CSCO CSCO Cisco Systems Inc. Technology Communication Equipment 72.28 50.13 203.70 15.13 15.13 4.13 3.1100 46.5500 4 1.56 6.6600 7 8 Durable YES NO NO NO USA 1 11 27 A Mega Cap
NYSE:ABT ABT Abbott Laboratories Healthcare Medical Devices 57.50 111.81 194.11 34.18 34.18 4.44 1.9700 46.6200 4 2.20 3.1600 5 7 Durable NO YES YES NO USA 1 8 63 B Large Cap
NASDAQ:INTC INTC Intel Corporation Technology Semiconductors 31.83 43.31 183.11 114.33 114.33 1.04 1.1500 182.8300 4 0.50 6.1900 3 1 Durable NO NO NO NO USA 1 11 88 D Large Cap

Intermediate

This is a catch-all for many basic materials and energy companies. It represents a company that doesn’t reach consumers directly and is instead consumed by another business before it reaches the consumer.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NYSE:TMO TMO Thermo Fisher Scientific Inc Healthcare Diagnostics & Research 57.72 550.75 212.79 35.64 35.64 21.54 0.2500 6.7700 4 1.40 8.5700 7 4 Intermediate NO NO NO NO USA 1 8 33 B Mega Cap
NYSE:LIN LIN Linde Praxair Inc. Basic Materials Specialty Chemicals 65.38 419.42 203.37 33.30 33.30 14.21 1.2200 30.1000 4 5.10 9.0600 8 7 Intermediate NO YES YES NO USA 1 1 93 A Mega Cap
NYSE:DHR DHR Danaher Corporation Healthcare Diagnostics & Research 51.71 242.95 179.52 43.09 43.09 8.52 0.4000 14.2100 4 0.96 12.6900 7 2 Intermediate NO NO NO NO USA 1 8 33 B Large Cap
NYSE:GE GE General Electric Industrials Specialty Industrial Machinery 23.43 139.28 151.58 17.41 17.41 2.80 0.2300 7.2600 4 0.32 0.0000 0 3 Intermediate NO NO NO NO USA 1 9 94 D Large Cap
NYSE:COP COP ConocoPhillips Energy Oil & Gas E&P 38.67 111.16 130.96 12.14 12.14 8.78 2.0900 0.0000 4 2.32 0.0000 4 3 Intermediate NO NO NO NO USA 1 5 69 D Large Cap

Building a Tollbooth Portfolio

In the end, tollbooth and subscription businesses mean repeat customers. Back to the car business, a manufacturer would love to lock in customers with their brand, instead every time they roll over new models, they risk losing customers to another brand. Subscription implies loyalty and repeat spending which is very profitable for a business.

While the sector or industry classification could match a segment, it’s not always a 100% match. I strive to invest in companies that fit the first 3 categories above.