Best Stocks for the Long Haul

This article is part of our Rising Star Portfolios series.

I kicked off my multivitamin Rising Stars portfolio by buying a stock that I hope will anchor my port for decades to come. Only a "corporate El Dorado" would fit the bill, and in my case, that turned out to be Coca-Cola. Today I'll give you a list of more of these world-beating companies to consider.

But first ...

Corporate what?
Wharton professor Jeremy Siegel came up with the term "corporate El Dorado" while studying the common characteristics of the greatest stocks in S&P 500 history. He found that 97% of the total after-inflation accumulation from stocks came from reinvesting dividends.

Dividend-paying stocks act, in Siegel's words, as "bear-market protectors" and "return accelerators." When dividends get reinvested, they purchase more and more shares at lower prices during a bear market. These extra shares act as a bear-market protector. Then, when share prices reverse, the extra shares act as a return accelerator and rocket total returns higher.

If you need more proof, consider that the 20 best-performing survivor stocks in Siegel's study from the original S&P 500 in 1957 are all dividend payers -- names like Altria (NYSE: MO  ) , Abbott Labs, Bristol-Myers Squibb, Tootsie Roll Industries, and Coca-Cola. Altria, as Philip Morris, was the top performer in Siegel's 1957-2003 study period with an incredible annualized return of 19.75%. That was enough to turn an original $1,000 investment into $4.6 million!

Elements of greatness
Siegel also found some other common characteristics of Altria and these 20 corporate El Dorados. The most important is the ability to deliver greater-than-expected earnings growth on a consistent basis. Carrying an average price-to-earnings ratio slightly above the market average, these companies weren't exactly cheap on a traditional basis. But throughout the years, they always seemed to deliver a bit more than the market expected.

Also, most of the top 20 marketed famous consumer brands or were pharmaceuticals. Brands like Coke, Marlboro, and Wrigley have strong moats because of products consumers are willing to pay a little bit more for. As Charlie Munger once described, if you walk into a store and see Wrigley chewing gum selling for $0.40 and Glotz's gum selling for $0.30, you're not going to flinch at paying that extra "lousy dime" for a product you know and trust. But those dimes add up significantly for Wrigley over time!

Putting it all together
Enough preamble; it's time for the screen. Remember, we want large caps with a history of dividend increases. We want companies with strong balance sheets, so we don't have to worry about them getting into any trouble during hard times (as so many companies did in our most recent crisis). We also want businesses with a track record of consistent earnings and dividend growth.

Obviously, we'll start with all of the dividend-paying companies on major U.S. exchanges. Here are the rest of our screening criteria:

  1. Market cap greater than $20 billion.
  2. Total debt-to-capital ratio less than 60%.
  3. Average annual earnings-per-share growth over the past 10 years greater than 5%.
  4. Projected annual earnings-per-share growth over the next five years greater than 5%.
  5. Positive dividend growth over the past five years.

The screen produced exactly the type of companies you'd expect, along with a few lesser-known businesses. I'll put the complete list of 72 passing companies on our discussion board, but here are several that fit the corporate El Dorado profile:

Company

Market Cap (Millions)

Debt/Capital

 5-Year Growth (Projected)

Dividend Yield

Abbott Laboratories (NYSE: ABT  )

$78,137

46%

9%

3.8%

Johnson & Johnson

$162,937

23%

6%

3.6%

McDonald's

$79,333

44%

10%

3.2%

3M

$66,355

26%

13%

2.4%

ExxonMobil (NYSE: XOM  )

$426,192

9%

6%

2.1%

Teva Pharmaceutical (Nasdaq: TEVA  )

$45,374

24%

13%

1.7%

Walgreen (NYSE: WAG  )

$37,543

14%

14%

1.7%

Johnson Controls (NYSE: JCI  )

$27,297

25%

17%

1.6%

CVS Caremark (NYSE: CVS  )

$49,496

21%

11%

1.4%

Data provided by Capital IQ.

If you don't have any corporate El Dorados in your own portfolio, this is a good list to start your research.

Since the Coke purchase, I also added Abbott Labs and Johnson & Johnson to my Rising Stars port -- which is progressing nicely. You can keep up with my buys and sells and all my meandering ruminations on Twitter.

Johnson & Johnson, Coca-Cola, and 3M are Motley Fool Inside Value choices. Johnson & Johnson, Coca-Cola, and McDonald's are Motley Fool Income Investor selections. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Abbott Laboratories, Altria Group, Coca-Cola, ExxonMobil, Johnson & Johnson, and Teva Pharmaceutical Industries. Motley Fool Alpha LLC owns shares of Abbott Laboratories and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days.

Fool analyst Rex Moore sometimes ruminates on rheumatism. He owns shares of Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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