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.