5 Unbelievably Solid Companies

Quick test: Which of the following is false?

  • The average American's lifespan is nearly 80 years.
  • The average large American corporation's lifespan is between 20 and 50 years, depending on the source.
  • Dinosaurs still exist and can be seen roaming throughout Kansas, Nebraska, Iowa, and Rhode Island.

You didn't hear about the T-Rex in Pawtucket?
Oh, OK, we'll fess up: Dinosaurs remain extinct. Which means that an average American outlives an average large-sized American corporation by a factor of two or more.

Two years ago, we wrote a column advocating that investors look for companies with the following four characteristics:

  • Built to last for 100 years or more.
  • Little-known, yet dominating their growing industries.
  • Steered by committed management teams.
  • Governed by the highest corporate values.

Little did we realize just how preposterous it is that companies would be built for "100 years or more"! In fact, according to Arie de Geus, author of The Living Company, "a full one-third of the companies listed in the 1970 Fortune 500 … had vanished by 1983 -- acquired, merged, or broken to pieces."

Professor Jeremy Siegel's meticulously researched book The Future for Investors studied the original firms of the S&P 500, which was put together in 1957. Of those 500 firms, Siegel found, just 25% survived intact to 2003! Over that 46-year span, the other 75% (fully 375 companies) went bankrupt, merged, or were taken private.

That's our advice: Invest in unicorns and sasquatches
This doesn't invalidate our earlier advice -- that you should look to invest in businesses built to last for 100 years or more. If you can do that, after all, you'll align yourself with managers who are thinking long term rather than short term.

It does, however, make an elite group of U.S. businesses stand out even more -- for one shared trait that is almost as unbelievable as unicorns and sasquatches. Before we get to that trait, let's look at that List of Five:

  • Procter & Gamble (NYSE: PG  ) . Has been paying dividends without interruption since 1890.
  • 3M (NYSE: MMM  ) . In February, 3M raised its dividend for the 51st consecutive year.
  • Coca-Cola (NYSE: KO  ) . This year, raised its dividend payout for the 47th year in a row.
  • Johnson & Johnson (NYSE: JNJ  ) . Raised its dividend for the 46th straight year in 2008.
  • Johnson Controls (NYSE: JCI  ) . Has paid dividends to shareholders since 1887.

These five businesses have far surpassed the average -- each dates back at least 80 years. Even more impressive: Each has been paying a dividend for more than half a century.

We've written a lot about global stocks lately, but if you're a gun-shy investor looking for stocks on which to build your retirement foundation, dividend stocks are a vital arrow in your quiver.

Here's why
The benefit of dividends to shareholders is clear: You get paid cash each and every year regardless of whether the underlying stock is up, down, or indifferent. Furthermore, you can pocket that cash or use it to buy more shares of stock. Dividends, however, also have a benefit to the companies that pay them, and we think it's no coincidence that these long-lasting companies are all dividend payers.

That's because dividends -- and the need to be consistent in paying them once a company starts paying them -- force companies to be responsible with their cash. In fact, a recent paper by Douglas Skinner and Eugene Soltes of the University of Chicago found that dividend-paying companies have better earnings quality than their non-dividend-paying peers, and that "dividend-payers are less likely to report losses" [emphasis added]. And because companies only go out of business when they start losing money, it's clear that companies that don't lose money won't go out of business.

So, there's one little secret when you're seeking companies that are being built to last 100 years: Look for stocks that pay dividends.

It's not all joy in Dividend-ville
Of course, there are no sure things, and that's just as true with longtime dividend payers as it is in the NCAA tournament (nice job, Wake Forest). Even worse, the current economic downturn has forced a number of former "dividend dynasties" to cut or even do away with their dividends -- General Electric (NYSE: GE  ) and Bank of America (NYSE: BAC  ) are two high-profile examples. Thus, it's as critical now as ever to carefully scrutinize any stock you choose to invest in and diversify your portfolio broadly across a collection of superior companies.

If you're interested in doing just that, click here to join our Motley Fool Income Investor service free for 30 days. The dividend fiends there run a model portfolio of their top dividend stock ideas, and with yields creeping up recently as the stock market has dropped, their hunting grounds are as fertile as ever.

Join up and you'll enjoy immediate access to their six "buy first" dividend payers.

Brian Richards and Tim Hanson both own shares of 3M, but no other companies mentioned. 3M and Coca-Cola are Motley Fool Inside Value recommendations. Johnson & Johnson and P&G are Income Investor picks. The Motley Fool owns shares of P&G. The Fool's disclosure policy loves Dubuque, Iowa.


Read/Post Comments (15) | Recommend This Article (170)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2009, at 12:43 PM, csuftitans wrote:

    not to nitpick or anything, but 46 years and 47 years are not more than half a century. they would be almost half a century.

  • Report this Comment On March 27, 2009, at 1:02 PM, PurpleFool wrote:

    I had the same thought, then I realized he said 46 and 47 years of RAISING dividends, but over half a century of PAYING a dividend.

  • Report this Comment On March 27, 2009, at 1:05 PM, NightBengal wrote:

    ... not to nitpick back, but the author only said that they had been paying dividends for more than half a century. The information provided says the two companies you pointed out have been RAISING their dividends for that long, making no mention of how long they'd been paying out. Small difference, but it matters. :)

  • Report this Comment On March 27, 2009, at 1:21 PM, bigkansasfool wrote:

    What exactly is the point of the corporate lifespan stat? Those companies that 'disappeared' were mainly acquired and most likely at a premium to their actual value. Chances are that being a shareholder in the companies that have vanished has been more profitable given the large premiums that acquiring companies typically pay.

  • Report this Comment On March 27, 2009, at 2:07 PM, mikecart1 wrote:

    Agreed with bigkansasfool. Article is misleading. Owning a good company that gets bought out can be very profitable as you usually get a lot more money than the shares that you own are worth.

  • Report this Comment On March 27, 2009, at 2:47 PM, Melaschasm wrote:

    bigkansasfool raises and interesting question. It would be interesting to see what portion of companies were bought out, liquidated, or went private after their stocks tanked, compared to how many left the market for a premium.

  • Report this Comment On March 27, 2009, at 2:49 PM, Guthree wrote:

    I have a nitpick.

    I think a company that was taken private still fits the definition of "survived."

    Great article, btw.

  • Report this Comment On March 27, 2009, at 6:51 PM, wuff3t wrote:

    "Agreed with bigkansasfool. Article is misleading. Owning a good company that gets bought out can be very profitable as you usually get a lot more money than the shares that you own are worth."

    bigkansasfool's comment does not make the article misleading at all, and neither does yours. The author of the article has done some research to back up their claims - if you want to disagree with article that's fine, but at least do some research of your own and quote it to us.

    Where is your evidence about whether or not those companies that have been bought out have been bought at a premium? Look at your own portfolio right now and see - given how much share prices have dropped over the last 18 months - whether you would be up or down if some of those companies were bought out. Even at a premium to today's prices many people who bought shares say, two years ago, would lose a lot of money if their shares were bought now.

    If you're going to criticise, do so from solid ground...

  • Report this Comment On March 27, 2009, at 10:10 PM, FoolishJayhawk wrote:

    "We've written a lot about global stocks lately, but if you're a gun-shy investor looking for stocks on which to build your retirement foundation, *divided* stocks are a vital arrow in your quiver." (*Emphasis* added by me).

    I think you mean *dividend* and NOT *divided*!

  • Report this Comment On March 27, 2009, at 10:36 PM, wuff3t wrote:

    "bigkansasfool raises and interesting question. It would be interesting to see what portion of companies were bought out, liquidated, or went private after their stocks tanked, compared to how many left the market for a premium."

    Melaschasm, it possibly is an interesting point, we look forward to you researching the answers for us. Do let us all know.

  • Report this Comment On March 28, 2009, at 12:06 AM, cautiouswillie wrote:

    I did the research. 3M paid a dividend of 51 cents recently. That's about $2 per year. For that I pay around $50. Not bad, but I can do MUCH better these days.

    Because of the dislocation in the markets, I can get a dividend of about $2 from just about any REIT preferred stock, and they are currently priced from $5 to $18. So, for the same $50, I can buy 3 to 10 times that same dividend. Example: AHT A series. Cost: just over $7, annual dividend about $2. Return between 25% and 30% per year. In cash. Buffett territory.

    I know those stocks have more risk and they haven't been around for 100 years, but I'm not going to be around for 100 years any more, either. Besides, being preferred stock, they carry much less risk than common stock. Dividends accumulate when skipped, so, worst case you get it late.

    Oh, and that's not including price appreciation. See, these stocks normally trade above $20, so when sanity is restored to the markets (I know, that's a different discussion entirely) there's still a few hundred percent capital gain on top of the rich dividend!

    The more I look around, the more I think these are once in a lifetime steals, simply because nobody ever talks about preference shares.

    I learned about these from some other Fool and started converting my portfolio. The first dividends should start coming in the next few weeks, but in the past three months, prices have already jumped 20-40% as more people are learning about this little corner of the market.

    Fool on!

  • Report this Comment On March 28, 2009, at 12:16 AM, trenton1ryan wrote:

    Can't be that great an article if we're arguing over a couple of years or a misspelled word.

    Started out good, but deteriorated into the same old same old. TMF needs to work on their endings (plus, the NCAA reference was silly and a waste of space).

    You have a lot of articles about dividend stocks, but I never see any about MLP's. Their dividends blow JNJ and PG away by miles. I'm earning 9-10% on my $ right now, and in a Roth no less.

  • Report this Comment On March 28, 2009, at 7:03 AM, wuff3t wrote:

    trenton1ryan,

    "Can't be that great an article if we're arguing over a couple of years or a misspelled word."

    You'd be amazed at what people end up arguing about on these boards...:-) Many people seem to wilfully ignore the content of the articles so that they can spout their anti-democrat or anti-republican sentiments. Focussing on a couple of years here or there, or the author's (or editor's?) spelling prowess, is a sign of someone who simply wanted to pick an argument no matter how good or bad the article was.

    Not picking a fight with you, by the way - I have no beef with your comments. Just making a general observation.

  • Report this Comment On April 03, 2009, at 6:59 PM, drborst wrote:

    I read something in a biology text book once. The essence of it was the length of time a species has been around has no bearing on the probability of extinction.

    I bet we can name companies that have been around for a very long time only to disappear in a bad way. Anyone remember Montgomery Ward? Or how about GM, which was once the largest company in the world.

    I don't think this article is misleading (dividends are important), I just think its wrong about looking for 50-100 year old companies.

  • Report this Comment On April 03, 2009, at 10:58 PM, makule wrote:

    clean coal is an oxymoron

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