How Did You Miss This Stock?

If you're a nerd like I am, then you've read your Jeremy Siegel research and can name the top-performing S&P 500 stock from 1957 to 2003. But if you don't know the name of that stock, see if you can guess it from the five hints below.

  1. It was a "sin stock."
  2. Thanks to perceived risks surrounding its core product, the stock was perpetually undervalued.
  3. The company benefited from having a brand that remains one of the most-recognized in the world.
  4. The company generated significant recurring cash flows.
  5. It paid a dividend.

Can you guess?
It turns out that this super-stock delivered a near-20% annual return from 1957 to 2003, performance that would have turned a measly $1,000 into more than $4 million.

And the secret to getting this return, Siegel discovered, was a combination of hint No. 2 and hint No. 5. By taking the company's hefty dividend and reinvesting it in its perpetually undervalued shares, investors ended up really juicing their returns.

So what was the stock? You probably guessed that it was cigarette-maker Altria (NYSE: MO  ) -- a stock that's still paying a greater-than-7% yield.

Yet even if you don't wish to own Altria -- given what it sells, some don't -- the lessons its stock teaches are relevant for everyone who seeks to make good money in the market.

Look for:

  1. Undervalued stocks with ...
  2. Strong brands that ...
  3. Generate recurring cash flows and ...
  4. Pay a rising dividend to shareholders.

A lineup of promising suspects
Our research team at Motley Fool Income Investor specializes in finding these types of stocks for their investors. While I can't give away their current picks, here are six stocks they told me I could tell you they're watching:

Stock

Current Yield

5-Year Dividend Growth Rate

Wal-Mart (NYSE: WMT  )

2.2%

25.5%

McDonald's (NYSE: MCD  )

3.7%

29.5%

Lockheed Martin (NYSE: LMT  )

3.7%

21%

Leggett & Platt (NYSE: LEG  )

5.4%

12.1%

Telefonica (NYSE: TEF  )

7.3%

21.3%

Verizon (NYSE: VZ  )

6.5%

3.8%

Data from Capital IQ, a division of Standard & Poor's.

They may not look exciting -- which may be why people miss them. But they share some key traits that make them excellent candidates.

First, because they're in industries like consumer staples and telcom, these companies generate sustainable cash flows. Second, as you can see in the table, these companies have demonstrated a commitment to rewarding shareholders by growing their dividends over time. And third, they all boast healthy yields that exceed the market average.

Put those payouts together with the chance that these stocks will rise over time, and you have a nicely defensive investment opportunity.

If you want more solid dividend stocks with significant total return potential, click here to join Income Investor as our free guest for 30 days. There is no obligation to subscribe, and you'll enjoy full access to all of the team's research and recommendations.

Already a member of Income Investor? Log in at the top of this page.

Tim Hanson does not own shares of any company mentioned. Wal-Mart is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (82)

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 November 05, 2009, at 4:52 PM, georcole wrote:

    Mr. Hanson,

    I clicked on the link to see more about TEF and it said that the dividend was only 3.8%. I just wanted to let you know. Great article though. Thank you.

    George

  • Report this Comment On November 05, 2009, at 5:45 PM, kelbon wrote:

    Yes, a yield of 3.8% at current prices is about right for Telefonica.

    They cut their dividend this year from $3.80 a share to $3.20 (projected). $3.45 a share is on the cards for 2010. Although the dividend increase over the last five years is impressive, it's in the past, and is estimated to ramp-up only about 5% a year for the next five.

  • Report this Comment On November 05, 2009, at 8:46 PM, parcheymex wrote:

    You are correct that some people do not purchase stocks of companies selling harmful products. All well enough for me but when they testify in public and under oath with lies and falsehoods of a very general sort they are beyond the civilized.

    For nine years I counselled and led groups of people

    trying to stop smoking. I was successful where many have failed and I am anything but falsely modest.

    I wish those who do not have my background all the best luck and, in general, undervalued companies are

    a good buy!

  • Report this Comment On November 05, 2009, at 11:26 PM, wolfhounds wrote:

    I love the big secrets TMF hides to get new subscribers. Let's see. Would my investments in PEP,PG,CL, and ABT for over 20 years qualify? With reinvested dividends, of course. I don't think anyone with just a little bit of research would have missed these.

    No charge.

  • Report this Comment On November 06, 2009, at 12:08 AM, Stampmaster1952 wrote:

    Take a look at RPM and SPH, Suburban Propane. 7%

    RPM 4.3 % has increased the dividend for 36 straight years. check 'er out.

    Here is a gas stock--LINE Linn's 11%

    happy investing.!

  • Report this Comment On November 13, 2009, at 6:52 PM, LawrencePA wrote:

    The Motley Fool has not done too bad. I road tested them on CGA (a chinese fertilizer company), AMD, and OCR (something to do with perscription drugs). In two weeks I made about 3 grand, give or take a hundred, utlizing about 35k. The way i figure it, The Motley subscription is free at this point and i'm 2,600 ahead of the game. If your nervous about Motley advice on a particular stock, invest 10% of what you normally would and test it out.

    -Lawrence

  • Report this Comment On November 13, 2009, at 7:51 PM, h53echo wrote:

    I have been buying Realty Income (O) for several years. Always in the mid to low 20's and reinvest my monthly dividends. The total return is fantastic with monthly ,payouts, triple net leasing, 86% recovery on the here in Escondido where its headquartered.

    I have also owned and still do QCOM-NUAN-TELO-EWZ-IFN-AVAV-FUQI-CGA-NOV-BHP, and GOOG (40 shares at $300).

    I try to keep my holdings under $10,000 per stock and put 10 % stops on them. Most of my suggestions have come from IBD and Motley Fool.

    I've got three high risk stocks, GORO, KTCC, and AVII. These I am only into for $5000 each

    If anyone has suggestions please feel free to comment

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1034511, ~/Articles/ArticleHandler.aspx, 8/29/2014 1:44:51 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement