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"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
I'll tackle the 10-year question in a future column, but for today, let's take it up a notch. If you had to put all your money in one dividend stock for the next 100 years, which one would it be?
Let's ignore the fact that you likely won't be around to see your results. We'll do this for your grandkids or your grandkids' grandkids.
Stick around, and I'll walk you through my thought process in picking the stock I believe will be the best dividend stock for the next 100 years.
Akin to a man on his deathbed, looking at stocks 100 years out provides us with a sense of perspective we miss in the day-to-day grind. The importance of a company missing quarterly earnings by a penny or even struggling for years during a recession fade away over a century.
Instead, we can focus on just a few guiding principles to whittle down a list of 477 companies. These are the companies that meet minimum requirements for size (at least $2 billion in market cap) and dividends (at least a 2% yield).
The first guiding principle is that the company must be ...
The simpler the business model, the less chance we as investors fail to see trouble coming. There's also less chance of bad management ruining a great business.
This rules out high finance companies like bank superstore JPMorgan and mortgage real estate investment trust Annaly Capital. Annaly's more focused, but both engage in financial instruments that require a hard-to-master-for-a-whole-century combination of skill, timing, luck, and management. As investors, it's very difficult for us to evaluate current balance sheets and management, much less anticipate what kinds of financial innovations Wall Street will cook up in the future.
We can throw insurance companies such as Allstate and sprawling conglomerates such as General Electric under the complexity bus, too. We have to trust the former to charge enough in premiums to properly offset the risks of new policies but also stash those premiums in safe yet profitable investments. See AIG for what could go wrong with that. As for General Electric, with all its divisions (including the bank-like GE Capital), there is a lot of room for miscalculation.
The second guiding principle is that the company has to be relatively ...
Impervious to disruption
Lack of simplicity takes out many of our 477 companies. Susceptibility to disruption takes out a bunch more.
Every company will eventually get disrupted. There's a steering wheel for every buggy whip, but some change is more rapid than others. Technology-reliant companies such as Microsoft, AT&T, and Lockheed Martin are obviously at risk. Retailers relying on fickle consumer tastes fail here, too (see the trajectories of Montgomery Ward and Sears). Thinking longer term, a currently rock-solid company such as ExxonMobil (NYSE: XOM ) , whose fossil fuels "won't be going away anytime soon," faces increasingly efficient alternative sources.
And the final guiding principle is that the company has to be ...
Besides being simple and disruption-proof, a company that's low maintenance is ideal. Capital-intensive businesses like heavy manufacturing and utilities don't fit the bill. Neither do companies like pharmaceuticals that have to continuously replenish their product pipelines. Sorry, Abbott Labs.
The best dividend stock for the next 100 years
After I applied these three criteria, I got from 477 companies down to about 20 companies. If you've paid especially good attention, you may be guessing correctly that the survivors are predominantly companies with strong brands that attend to consumers' basic needs.
They're simple, relatively impervious to disruption, and relatively low maintenance.
Good cases can be made for tobacconists Altria (NYSE: MO ) and Philip Morris International (NYSE: PM ) , which pass all three tests and pump out huge dividends, but looking out over 100 years I'd argue the three strongest of the strong are:
Current Dividend Yield
|McDonald's (NYSE: MCD )||1948||3.2%|
|Coca-Cola (NYSE: KO )||1886||2.8%|
|Procter & Gamble (NYSE: PG )||1837||3.3%|
Source: Capital IQ, a division of Standard & Poor's.
Abraham Maslow and the cast of Survivor would agree. Our needs don't get much more basic than food, drink, and hygiene.
To answer the question of which stock is the best dividend stock for the next 100 years, let's go back to the three criteria.
Coca-Cola is the simplest. It's laser-focused on providing the world with non-alcoholic drinks. Furthermore, Buffett has commented that "a ham sandwich could run Coca-Cola."
In terms of disruption, the Coke and PepsiCo (NYSE: PEP ) duopoly has had to deal with an increasingly diverse market as they've seen the rise of bottled sports drinks, energy drinks, teas, and waters. But Coca-Cola is more than just its eponymous soft drink. It owns brands across the spectrum, including Powerade, Full Throttle, Honest Tea, and Dasani. Coke and Pepsi tend to buy up potential competitors and incorporate them into their marketing and distribution machines.
There is some maintenance in keeping up the branding through advertising, competitor purchases, and brand extensions, but let's remember the core Coca-Cola brand has already proven itself for more than 100 years. All this makes Coke my pick for most likely to be thriving 100 years from now.
Coca-Cola's prospects for a stable future make it a stock worth paying a premium for. That said, use the market's volatility to your advantage. Even Coke's relatively stable shares have risen almost 40% from low to high in the last year. Be patient and pick up shares of this great company at a good price. Consider the more diversified PepsiCo as well. Your grandkids' grandkids will thank you.
For more great stocks to consider, check out our free dividend report, "13 High-Yielding Stocks to Buy Today." It features another long-term play you can hold for the rest of your life. Simply click here to get free instant access.