April's El Dorados: Rock-Solid Stocks
This article is part of ourRising Star Portfolios series.
I kicked off my multivitamin Rising Star portfolio by buying a stock that I hope will anchor my portfolio for decades to come. Only a "corporate El Dorado" would fit the bill, and in my case, that turned out to be Coca-Cola. Each month I'll be running my screen to give you a list of more of these world-beating companies to consider.
I'm also tracking and scoring each one of my monthly screens now, so we can see exactly how they're performing. More on that in a moment.
Wharton professor Jeremy Siegel came up with the term "corporate El Dorado" while studying the common characteristics of the greatest stocks in S&P 500 history. He found that 97% of the total after-inflation accumulation from stocks came from reinvestingdividends.
Dividend-paying stocks act, in Siegel's words, as "bear-market protectors" and "return accelerators." When dividends get reinvested, they purchase more and more shares at lower prices during a bear market. These extra shares act as a bear-market protector. Then, when stock prices head back up, the extra shares act as a return accelerator and rocket total returns higher.
If you need more proof, consider that the 20 best-performing survivor stocks in Siegel's study from the original S&P 500 in 1957 are all dividend payers -- names such as Altria, Abbott Labs, Bristol-Myers Squibb, and Tootsie Roll Industries, as well as Coca-Cola. Altria, as Philip Morris, was the top performer in Siegel's 1957-2003 study period, with an incredible annualized return of 19.75%. That was enough to turn an original $1,000 investment into $4.6 million!
Elements of greatness
Siegel also found some other common characteristics among these 20 corporate El Dorados. The most important is the ability to deliver greater-than-expected earnings growth on a consistent basis. Carrying an average price-to-earnings ratio slightly above the market average, these companies weren't exactly cheap on a traditional basis. But throughout the years, they always seemed to deliver a bit more than the market expected.
Also, most of the top 20 marketed famous consumer brands and pharmaceuticals. Brands like Coke and Wrigley have strong moats because of products that consumers are willing to pay a little bit more for. As Charlie Munger once described, if you walk into a store and see Wrigley chewing gum selling for $0.40 and Glotz's gum selling for $0.30, you're not going to flinch at paying that extra "lousy dime" for a product you know and trust. But those dimes add up significantly for Wrigley over time!
Putting it all together
Enough preamble; it's time for the screen. Remember, we want large caps with a history of dividend increases. We want companies with strong balance sheets, so we don't have to worry about them getting into any trouble during hard times (as so many companies did in our most recent crisis). We also want businesses with a track record of consistent earnings and dividend growth.
I start the screening with all companies on major U.S. exchanges with a dividend yield of at least 1%. Here are the rest of the criteria:
- Market cap greater than $20 billion.
- Total debt-to-capital ratio less than 60%.
- Average annual earnings-per-share growth over the past 10 years greater than 5%.
- Projected annual earnings-per-share growth over the next five years greater than 5%.
- Positive dividend growth over the past five years.
A total of 80 companies passed the screen, and I'll post the complete list on my Rising Star discussion board. As you look through the companies, you'll see several that practically shout "I'm an El Dorado!" at you. The strong consumer brands such as Coke and PepsiCo, McDonald's, Kraft Foods, and ExxonMobil. The pharmaceuticals and consumer goods producers like Abbott Labs, Teva Pharmaceutical (NAS: TEVA) , Johnson & Johnson, Procter & Gamble (NYS: PG) , and 3M (NYS: MMM) .
You'll need to stay in your comfort zone, and realize these are stocks meant to anchor your portfolio and be held for the long term. Just drop any questions you have on the discussion board.
You can stay on top of my buys and sells and all my meandering ruminations on Twitter. You can also add any of these candidates to your free, personalized watchlist by clicking the appropriate link below.
- Add ExxonMobil to My Watchlist.
- Add Teva Pharmaceutical Industries to My Watchlist.
- Add PotashCorp to My Watchlist.
- Add Procter & Gamble to My Watchlist.
- Add PepsiCo to My Watchlist.
- Add 3M to My Watchlist.
- Add McDonald's to My Watchlist.
- Add Coca-Cola to My Watchlist.
- Add Kraft Foods to My Watchlist.
- Add Johnson & Johnson to My Watchlist.
- Add Intel to My Watchlist.
- Add Abbott Laboratories to My Watchlist.
At the time this article was published Fool analyst Rex Moore is fearfully referred to as "Mr. El Dorado" by his co-workers. He owns shares of Procter & Gamble and Johnson & Johnson. The Motley Fool owns shares of PepsiCo, Intel, Johnson & Johnson, Abbott Laboratories, and Coca-Cola. Motley Fool newsletter services have recommended buying shares of PepsiCo, 3M, Johnson & Johnson, ExxonMobil, Intel, Teva Pharmaceutical Industries, Procter & Gamble, Coca-Cola, McDonald's, and PotasCorp. Motley Fool newsletter services have recommended creating diagonal call positions in Johnson & Johnson, 3M, and PepsiCo. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.