Most people believe that investors with different time horizons should be investing in different types of stocks.
Retirees should be investing in safe, mature companies that pay dividends and are generally risk-averse. Young investors, on the other hand, should be investing in high-growth, dynamic companies that are more prone to high-risk, high-reward scenarios.
But is that really true?
Drawing the right conclusions
Naturally, retirees and near-retirees are more concerned than their younger counterparts with the overall safety of their principal, and with finding stocks that provide them income. But even if you're 60 years old, you're investing for the next 20 to 30 years -- and you need stocks that will appreciate over the long term.
Younger investors, because of their longer time horizon, are sometimes willing to take on more risk by looking toward growth stocks such as salesforce.com
And no matter how long your horizon is, buying stocks for less than they're worth helps ensure you're your returns will go up, not down.
But is it possible to find it all -- income, growth, and value -- neatly wrapped in one package?
The best stock for you
Everyone knows that dividend stocks provide you with income; and if purchased at good prices, they can reflect great value as well.
But growth? Yep, growth, too. Consider the study by Professor Jeremy Siegel, which illustrated that the S&P's 100 highest-yielding stocks outperformed the overall index by 3 percentage points every year from 1957 to 2003. That's pretty impressive, considering dividend stocks are supposed to be more conservative investments.
You've got to be careful, though -- some companies pay substantial dividends, but can't really afford to do so. These companies have abnormally high payout ratios and should be avoided --a high ratio indicates they may not be able to sustain their dividend. For instance, Williams-Sonoma and Wynn Resorts
To find the best stocks out there today, I ran a screen for companies with sustainable dividend yields greater than 2.8%, low price-to-earnings ratios, and EPS growth rates greater than 10%. Here are five stocks that fit the above criteria:
|
Company |
Dividend Yield |
Price-to-Earnings Ratio |
EPS Growth Rate (3 years) |
Dividend Payout Ratio |
|---|---|---|---|---|
|
Kimberly-Clark |
4.4% |
13.3 |
11.6% |
53% |
|
McDonald's |
3.4% |
16.0 |
21.5% |
50% |
|
China Mobile |
3.4% |
11.9 |
23.3% |
40% |
|
California Water Service |
3.3% |
18.7 |
13.3% |
61% |
|
Abbott Laboratories |
3.2% |
14.6 |
49.0% |
42% |
As you can see, these stocks trade at reasonable values, offer rock-solid and sustainable dividends, have proven that they can grow earnings -- and best of all, they're not highly volatile, so they won't take you on some crazy roller-coaster ride.
The Foolish bottom line
No matter how distant your time horizon, strong dividend stocks with growth potential that are priced below their value are a valuable part of your portfolio.
At the Motley Fool Income Investor, we seek precisely these attributes. Our analysts aim to find companies that will pay you hefty dividends -- but they also select companies that are sure to experience earnings growth. In fact, Income Investor has been recommending stocks since 2003, and its picks are beating the market by more than 7 percentage points, on average.
If you're interested in learning more about the newsletter or seeing all of our past and present recommendations, you can be a guest of the service, free for 30 days -- no strings attached. Click here for more information.
Fool contributor Jordan DiPietro owns no shares mentioned above. salesforce.com is a Motley Fool Rule Breakers pick. California Water Service Group and Kimberly-Clark are Income Investor selections. The Fool owns shares of California Water Service Group and China Mobile. The Fool's disclosure policy knows that reinvesting dividends is a major key to success.
