Roundtable: Best Dividend Stocks for Beginners

You asked, we answered! On The Motley Fool's Twitter feed, we recently invited readers to send us their burning financial questions. (Don't worry; we had a fire extinguisher standing by.) In response, Foolish follower @LadyFox7Oaks asked:

I'm just starting, know little, have about $500, and want a solid stock with dividends as my first. What should I look for?

We've put that question to an all-star team of Fools from across the investing spectrum, and asked them to suggest one dividend-paying stock that might be a great place for new investors like LadyFox7Oaks to start. Keep in mind that these aren't ironclad recommendations -- just suggestions to kick-start your own further research.

John Rosevear, Fool contributor
Here's what I think a beginner's dividend stock should look like:

  • Easy to understand. It's obvious how the company makes its money. The risks and dynamics of the business are straightforward.
  • Well-run. Management is on the ball and taking advantage of growth opportunities. Long-term debt is low or nonexistent.
  • Good, sustainable dividend. "Sustainable" is key -- you want to collect that good dividend next year, too.
  • History of raising dividends. A stock with a history of raising dividends will tend to see its price rise over time, as investors pay for growth.

With all that in mind, take a look at PepsiCo (NYSE: PEP  ) . Cola is about as simple as a business gets -- marketing and brilliant distribution are the keys -- but PepsiCo has been adding and acquiring complementary brands and product lines for years. Cheetos, Doritos, Lays potato chips, Aquafina water, Quaker Oats ... all of those (and more) are PepsiCo products, and they all ride that great distribution system to corner stores and gas stations around the country.

PepsiCo's dividend yield is a bit more than 3% at current prices. That's not flashy, but it's good -- and PepsiCo has raised its dividend every year for the past 38 years, so you're likely to get a more cash as you hold the stock over time. Add in recession-resistant products, low debt, a huge moat, and significant global growth opportunities, and this one looks like a strong choice.

Jim Mueller, Fool financial editor
What would I recommend as a first dividend-paying stock? A company with repeat customers, lots of cash flow that can be sent to the owners, and a steady history of increasing the dividend. Cigarette giant Philip Morris International (NYSE: PM  ) is currently at a 5.2% yield, and it's raised its dividend twice since being spun off from Altria. Smoking is still extremely popular, and the company has some of the strongest brands in the world.

Alex Dumortier, Fool contributor
In looking for a good dividend stock for a beginning investor, I wanted to meet the following criteria:

  • Dividend yield at least one percentage point higher than that of the S&P 500.
  • Operating in a defensive industry. I like stable, defensive businesses in the best times, but I find them particularly attractive in a recovery that may not be self-sustaining.
  • Shares significantly less volatile than the broad market. Volatility tends to deter beginner investors; lower volatility helps them "stay the course."
  • Reasonably valued. Overpaying for shares is an excellent way to fritter away your money -- regardless of how high the dividend yield is.

Branded consumer-products giant Procter & Gamble (NYSE: PG  ) matches all these qualities. Its shares yield around 3.2% -- just about the current yield on 10-year government bonds, but with the promise of growth. The consensus estimate for P&G's long-term earnings-per-share growth is about 9%.

Furthermore, the shares are about half as volatile as the S&P 500, and although they don't look massively undervalued right now, I calculate that investors can reasonably expect an annualized total return of 12%-13% over the next three to five years. Those aren't eye-popping returns, but in a world in which the broad market will barely keep pace with inflation, those numbers start to look pretty attractive, indeed.

Nate Parmelee, co-advisor, Motley Fool Global Gains
If you're just starting out and want dividends to play a major role in your portfolio take a look at Kraft Foods (NYSE: KFT  ) . Yes, it's a Buffett holding, which gets some folks excited, but there's more to this story than riding coattails. Kraft has a 4% dividend yield, and there's little danger of the dividend getting reduced, because it earns consistent cash flow from sales of Oreos and other snacks.

A growing dividend is just as important as a consistent one, and Kraft has you covered here, too. Its recent Cadbury acquisition diversified its revenues and gave Kraft a bigger share of global chocolate sales. More importantly, it improved Kraft's growth prospects by increasing its sales outside of the U.S., especially in faster-growing markets in Latin America and Asia. With 10-year U.S. Treasuries yielding just 3.2%, the combination of a safe 4% dividend yield and improving growth prospects is about as close as you can get to a slam dunk for long-term investors.

Editor's note: Nate also wanted to make sure we gave his awesome @TMFGlobalGains Twitter feed a shout-out.

Charly Travers, associate advisor, Motley Fool Million Dollar Portfolio
Brand new investors should build the foundations of their portfolio first with robust, durable companies that pay dividends. Someone looking to seed their portfolio with such a company right now would have a hard time finding a company more attractive than Coca-Cola (NYSE: KO  ) . With Coke, you get the world's best-known brand, an incredibly strong business, and a 3.4% dividend yield. Even better, Coke has raised its dividend every year for 48 years! As Coke continues to grow its business by expanding around the globe, it will keep paying you more and more money every year. Coke is it!

Anders Bylund, Fool contributor
The principle of buying low and selling high applies to dividend investing, too. Find a cheap stock with a solid dividend history and great fundamental finances, and you'll get dividend returns on the investment that will make every money market account green with envy. Right now, I can't find a better example than oil giant BP (NYSE: BP  ) , which generated $27.7 billion of operating cash flow last year and paid out $10.5 billion in dividends. It has a dividend yield of almost 9%, thanks to universal hate over the Deepwater Horizon disaster that has depressed BP's share price. This, too, shall pass -- but in the meantime, you'll get to keep the excellent cost basis and starting dividend yield.

Dan Caplinger, Fool contributor
With just $500 to invest, I'd recommend that a beginning investor start with an exchange-traded fund that focuses on dividend stocks, rather than picking a single company. The Vanguard Dividend Appreciation ETF (NYSE: VIG  ) owns shares of more than 140 different stocks, selected on the basis of their having a consistent history of raising their dividend payments over time. You'll find many of the stocks my fellow Fools have recommended above among its holdings.

Admittedly, a single stock would provide you with an opportunity to take a more in-depth look at a particular company. But choosing an ETF not only reduces your risk, but also gives you a starting point to find promising individual stock ideas as your portfolio grows. Once you're more familiar with investing, and you want to use all of the investing skills you'll develop in the coming months, you can feel more comfortable choosing individual stocks to add to your portfolio.

We want your questions!
Thanks to LadyFox7Oaks and all the other Foolish tweeters who sent us financial questions. We'll be answering more in the days to come. Want to add yours to our to-do list? Tweet us @TheMotleyFool, or leave a comment in the box below.

The Fool owns shares of Coca-Cola and Procter & Gamble. Coca-Cola is a Motley Fool Inside Value pick. Coca-Cola, PepsiCo, and Procter & Gamble also got the nod from Motley Fool Income Investor. Philip Morris International is a Motley Fool Global Gains selection. Motley Fool Options has recommended a diagonal call position on PepsiCo. Try any of our Foolish newsletters free for 30 days.

Nate Parmelee owns shares of Kraft, and Jim Mueller owns shares of Philip Morris International, but none of the other Fools featured here hold any financial position in the companies they wrote about. Fool online editor and lead Tweeter Nathan Alderman doesn't own any of these stocks, either. The Fool's disclosure policy really pays off.


Read/Post Comments (26) | Recommend This Article (88)

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 June 07, 2010, at 1:03 PM, TMFBane wrote:

    Everyone should be careful about BP, as its dividend is under threat. And if they do cut it significantly that could further depress the stock. Sometimes high yields are quite literally, "too good to be true."

  • Report this Comment On June 07, 2010, at 1:03 PM, plange01 wrote:

    i would add vz,and t and dump kraft which even buffett is selling out of.the overpriced and poorly made purchase of cadbury combined with a terrible ceo kills krafts future...

  • Report this Comment On June 07, 2010, at 1:23 PM, rd80 wrote:

    I'm not sure I'd put BP in the category of a good stock for beginning investors. Price swings with the news along with potential political attacks on the dividend payment make it more suited for an investor that's ridden the volatility roller coaster a few times.

    To replace BP? Repeat after me - MCD.

  • Report this Comment On June 07, 2010, at 2:54 PM, sagitarius84 wrote:

    For best dividend stocks, check this blog:

    http://www.dividendgrowthinvestor.com/2010/04/16-quality-div...

    Enjoy!

  • Report this Comment On June 07, 2010, at 4:35 PM, nickolassc wrote:

    sdrl over bp

  • Report this Comment On June 07, 2010, at 4:37 PM, nickolassc wrote:

    yum over mcd

  • Report this Comment On June 07, 2010, at 5:09 PM, Mstinterestinman wrote:

    KO And MCD are great places for beginners to start. I own BP but if your brand new and its your first 500 dollars that might be asking you to stomach a little too much.

  • Report this Comment On June 07, 2010, at 5:41 PM, park94 wrote:

    thx for the suggestion on how to lose my first dollars.But I'd rather buy a PS3 and watch the world cup. :P

  • Report this Comment On June 07, 2010, at 6:04 PM, aggiewes wrote:

    I have a financel question, what do you fools think about HP's buyout of palm?

  • Report this Comment On June 07, 2010, at 7:31 PM, leojanedy wrote:

    Great stocks, and here's some top stocks for you this week:

    http://www.yijiago.com/Blog/Blog.aspx?Id=328

  • Report this Comment On June 07, 2010, at 7:51 PM, leojanedy wrote:

    The S&P 500 slipped 1.4 percent to 1,050.47, the lowest level since Nov. 4, as of 4 p.m. in New York. The Dow Jones Industrial Average decreased 115.48 points, or 1.2 percent, to 9,816.49. Benchmark indexes rose earlier following growth in German factory orders and toned-down comments from Hungarian officials about a potential default.

  • Report this Comment On June 07, 2010, at 8:56 PM, sumbawa wrote:

    As Charly Travers says: "robust, durable companies that pay dividends". And I would add holding companies where you can sleep at night. BP is definitely not in that category right now. Estimates of the total spill cost are all over the map and with reason: no-one really knows.

    So for someone's first $500 I'd stick with the KOs, PEPs and PGs of the world. Another one to consider would be Diageo (DEO), beaten-down in the Euro-panic but with a stable of great brands and a 2.9% yield.

  • Report this Comment On June 07, 2010, at 9:38 PM, susan400 wrote:

    just a gen question, why do you assume these writers have talent?

    creating articles is one thing but that is a candid question

    susan400

  • Report this Comment On June 07, 2010, at 10:40 PM, neamakri wrote:

    I am all about the dividends. Buy 20 shares of a t&t (ticker = T). The dividend is over 6% and they have been reliable payers for over 25 years.

    Your next $500 should purchase altria (ticker = MO). The dividend is also over 6% and reliable for over 25 years. Collect your dividends in cash, not stock. Then use those cash dividends to buy another great stock later on...

  • Report this Comment On June 07, 2010, at 11:09 PM, brizzlekizzle wrote:

    Well some partnerships have a very high yield, I remember buying GLP when it was paying over 30%. Even now its paying over 9%. If you can find a solid dividend history in a business with solid fundamentals, at a low price with a high dividend yield, then your $500 will have been well invested.

  • Report this Comment On June 08, 2010, at 12:08 PM, InvestmentRep wrote:

    These are some great suggestions for investment, I actually found this website through a blog called the investment reporter which has given me some great ideas. I have found that at least two more good industries to invest in, especially during a recession, are defense (because our gov't has a huge defense spending budget) and companies which make alcoholic beverages (these stocks actually tend to perform better during recessions).

    oh, and here's a link to that blog if you're interested http://theinvestmentreporter.wordpress.com/

  • Report this Comment On June 08, 2010, at 2:53 PM, JasonApolloVoss wrote:

    Something often overlooked by folks who buy dividend paying stocks is that they can, and often do, generate asymmetrical returns relative to the overall market. Most equities track the market in lockstep +/- a few percentage points. If the S&P 500 is up 5%, most stocks are up around 5%. If the S&P 500 is down 5%, most stocks are down around 5%. This is 100% tracking. However, because dividend paying stocks pay a cash return, this mitigates any downward movement in the stock. So if the S&P 500 declines 5%, the stock declines 5%, but pays even a 2% dividend, then the stock's total decline is only 3%. On the upside, if the S&P 500 moves up 5%, the stock appreciates roughly the same, but plus its dividend. This situation creates asymmetrical returns - something deeply desired by all investors.

    Jason Apollo Voss, CFA

    Author of the forthcoming book "The Intuitive Investor"

    Publisher of the jasonapollovoss.blogspot.com blog

  • Report this Comment On June 08, 2010, at 4:00 PM, Puckplayr4 wrote:

    I am at a loss why utilities don't get more dividend coverage. My favorites are EDE and PWE, both pay close to 10% dividend and have customers that are more reliable than Coke, Pepsi, Kraft, Proctor and Gamble, etc., and BP. Let's be real, if you lose your job you'll drink generic soda, you'll buy discount gas, you'll buy discount laundry detergent, but you'll continue to pay your gas and electricity bill. Maybe the knock is that it's not a growth industry, but the last time i checked the population is still growing uncontrollably, and there aren't many more companies with a larger moat than a monopoly! I'd love to know where the Fool coverage is for this...

  • Report this Comment On June 08, 2010, at 5:35 PM, jfstinson wrote:

    I would strongly consider looking into some of the preferred shares. For instance JP Morgan (JPM-I) is currently yielding 7.9% or Wells Fargo (WFC-J) with similar yields. Us these to generate some cash and then purchase one of the "non BP" stocks listed above to gain some potential upside. plus a lesser dividend

  • Report this Comment On June 10, 2010, at 12:25 AM, 0123Abc wrote:

    Great question and interesting answers, imho, thanks.

  • Report this Comment On June 12, 2010, at 7:24 AM, wondrinfree wrote:

    I'm surprised by the negativity towards BP. If you are in it for the long haul then you are buying a discounted brand with a high yield which is also a major global player.

    Sure all the anti brit rhetoric and scapegoating is happening now (largely for political expedience), but when it does come to the court case then people are going to have to start recognising that the platform drilling operations were conducted by local firms rather than a handy foreign 'bad guy'. BP's liabilities should then shrink back to more modest levels. Making it it an absolute steal.

  • Report this Comment On June 13, 2010, at 3:33 PM, philkek wrote:

    Dividend stocks helped me double my money in 4 years starting out in 2004. The stocks listed here by M.F. fools all seem like good dividend stocks to own but the only one of these listed here that I held was PM.

    M.F. books helped me to learn important FUNDAMENTALS of investing. Do your own homework as advised here and you should do alright. If I can make it you can make it. Fool on as you grow over time.

  • Report this Comment On June 13, 2010, at 4:19 PM, amerrymaid wrote:

    I was all set to buy my first stock (I have mutual funds), but I had a family emergency & had to leave the country. I am looking at (nyse yum) nasdaq dwa) (nyse pg) & (brk-b). Any & all imput is welcome, I am definately a newby.

  • Report this Comment On June 13, 2010, at 6:22 PM, Pepperika wrote:

    From another newbie-You don't have to put all $500 in one stock. I bought 2 shares of IBM, MCD, 10 of BAC, etc. with my initial $1000 investment. Thus I was diversified, and by buying online it is no problem to invest in this manner, and the $7.00 commissions weren't significant. A regular broker would be problematic, of course.

  • Report this Comment On June 13, 2010, at 6:34 PM, Autoknowtive wrote:

    Somehow I think LadyFox7Oaks was looking for a more "affordable" stock (lower-priced). Dividends are great but if you can only purchase 7.86 shares (PEP) up to 17.06 shares (KFT), the dividends won't amount to much. Dividend payments are also not mandatory, so take a look at the stock price too. Your gains won't amount to much either(to make $50 on PEP, it'd have to rise almost $7, and almost $3 for KFT). Will you plan to hold on for short or long term? Out of all the suggestions, the ETF is probably the most reasonable to reduce the risk. And remember to reinvest the dividend!

  • Report this Comment On June 15, 2010, at 10:10 PM, neamakri wrote:

    I need to address Pepperika who stated that $7 commission is not significant. I advised to buy all one stock. Pepperika stated (he) purchased 2 IBM (about $260). The buy+sell commissions =$14 which amounts to 5.4%. IBM pays about 2.0% dividend, thus you will not see a profit the FIRST THREE years. BAC is much worse, it will take 35 years to recoup the commissions!

    I personally pay $9 per trade at Schwab, so I always buy/sell a minimum of $2000, thus my commissions are always less than 1% of my costs. I understand Scottrade does $4 trades, but they have some trades that "cost extra". Be advised.

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