How to Buy a Million-Dollar Stock

If I gave you $10,000 to invest for 30 years, with a goal of making me $1 million, what would you do?

You'd buy stocks, of course. What if I said you could buy only one stock? Which would it be?

What?!?
Call it my variation on Warren Buffett's famous exercise in focus. He suggests that investors should invest as if they have only 20 chances to buy in their lifetimes.

There's power in investing this way. First, it forces you to weigh risk carefully. Who wants to bet his portfolio on a fly-by-nighter like DivX (Nasdaq: DIVX  ) when that's all there is? Not you, right?

Second, it forces you to think about history. What are the characteristics of the best stocks of the past 50 years? Let's see:

Company

CAGR

Merck (NYSE:MRK)

15.97%

General Mills (NYSE:GIS)

13.58%

Philips (NYSE:PHG)

13.44%

Royal Dutch Shell (NYSE:RDS-B)

13.14%

Campbell Soup (NYSE:CPB)

11.58%

Source: J. Siegel, The Future for Investors. Returns from 1957-2003.

Examine these businesses and you'll find common elements:

  • They dominated necessary, if boring, markets.
  • They produced plenty of free cash flow.
  • They paid consistent and growing dividends.

History is anything but perfect when it comes to predicting stock market returns. But it's also all we have short of tarot cards, palm reading, and astrology. Doesn't it stand to reason that, if you really had to choose just one stock, you'd want a dividend payer?

Fine, here's the math
Consider the numbers. A stock would have to return almost 17% annually in order to transform $10,000 into $1 million within three decades. Or in simpler terms: You'd have to buy and reinvest in the next Altria -- a stock that, as Siegel points out, has combined heady capital appreciation with substantial dividend growth to produce better than 19% annual returns in the 46 years between 1957 and 2003.

Don't underestimate dividend growth. Buffett originally spent $11 million to acquire a stake in Washington Post, which, like Altria, has a history of hiking its dividend payments. Today, Berkshire Hathaway collects roughly $14.2 million annually in dividends from the newspaper.

Then there's this guy, who enjoys a 3,017% annual return thanks to dividends. Peter Lynch would be jealous. But what, really, did he do? He bought Pfizer at a low price and held it for 47 years.

That's the millionaire-making power of dividends at work -- with just one stock.

Intrigued? You should be. My Foolish colleagues James Early and Andy Cross are beating the market with a whole portfolio of high-yielding dividend payers. Accept a 30-day free pass to their Motley Fool Income Investor service and you'll see everything they're recommending right now. There's no obligation to subscribe.

This article was originally published on Oct. 1, 2007. It has been updated.

Fool contributor Tim Beyers owned shares of Berkshire Hathaway at the time of publication, as does The Motley Fool. Berkshire is a recommendation of both the Inside Value and Stock Advisor services. Pfizer is an Inside Value and Income Investor pick. The Motley Fool has a high-yield disclosure policy.


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