These Are Unbelievably Solid Investing Ideas

In a column last year, we profiled five companies that we called "unbelievably solid." Each of the companies had been paying dividends for more than half a century.

As a refresher, the names were Procter & Gamble (NYSE: PG  ) , 3M (NYSE: MMM  ) , Coca-Cola (NYSE: KO  ) , Johnson & Johnson (NYSE: JNJ  ) , and Johnson Controls (NYSE: JCI  ) .

We stand by that article
Keep those names in mind, because the good folks at Ned Davis Research have given us another reason to like them.

NDR has crunched the returns of S&P 500 stocks going back to 1972, segmenting them by a company's dividend policy. The data shows that over a 38-year time frame, companies that increase or initiate a dividend substantially outperform other types of stocks, and simply annihilate the returns of non-dividend payers:

Monthly data, 1/31/1972 to 9/30/2010. Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.html.

Yes, you read that correctly. While $100 invested in the average non-dividend payer grew to just $174 over the past 38 years, $100 invested in dividend growers and initiators grew to more than $3,200. With inflation likely, and interest rates low (who wants 1% from CDs and money markets?!), that return potential should get your attention.

So here's our idea
Devote a portion (at least!) of your portfolio to stocks that have a proven track record for raising their dividends, and which appear capable of continuing to do so. This means that they (1) already pay a dividend, (2) have shown a willingness to raise their dividend in the past, and (3) have a free cash flow payout ratio of less than 75%, which means that the company is generating more than enough cash to make it easy for the board to vote "yes" on a dividend increase.

What kinds of companies fit that profile? Take a look:

Company

Current Yield

5-Year Dividend Growth Rate

FCF Payout Ratio (TTM)

Microsoft (Nasdaq: MSFT  ) 2.4% 6.6% 18.9%
Procter & Gamble 3.0% 11.7% 47.9%
Coca-Cola 2.8% 9.7% 55.2%
3M 2.4% 5.2% 39.6%
Johnson Controls 1.4% 9.5% 46.0%
Johnson & Johnson 3.3% 10.5% 37.5%

Data courtesy of Capital IQ, a division of Standard & Poor's.As you can see, all five of the "unbelievably solid" stocks fit this profile, and we've added one more promising name to the list. Microsoft, which only started paying a dividend in 2003, has an enormous cash cushion (18.9% payout ratio) to enable future dividend increases.

Microsoft is among our team's portfolio holdings at Million Dollar Portfolio, and on Friday they added another long-haul dividend stalwart (a company that has increased its dividend every single year since 1974).

In these uncertain times, you can do a lot worse than adding the stability and potential outperformance of dividend growers like these. To learn more about Million Dollar Portfolio's lineup of dividend stocks, and to receive our new free report, "Motley Fool Top Picks & Perspectives 2011," enter your email address in the box below:

Fool.com managing editor Brian Richards owns shares of 3M and Microsoft. Global Gains advisor and Million Dollar Portfolio associate advisor Tim Hanson owns shares of 3M.

Coca-Cola, 3M, and Microsoft are Inside Value picks. Johnson & Johnson, Coca-Cola, and Procter & Gamble are Income Investor picks. The Fool owns shares of and has written covered calls on Procter & Gamble. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson and a diagonal call position on Microsoft. The Fool owns shares of Coca-Cola, Johnson & Johnson, and Microsoft. 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.


Read/Post Comments (8) | Recommend This Article (78)

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 November 08, 2010, at 6:34 PM, bernbern0 wrote:

    Excellent article and excellent comment by truthisntstupid! I own them all except JCI.

  • Report this Comment On November 08, 2010, at 6:40 PM, xetn wrote:

    That is good news since $100.00 in 1972 would require over $520.00 today based on the Fed's inflation calculator.

  • Report this Comment On November 09, 2010, at 2:32 PM, Glycomix wrote:

    'Free-Cash Flow Payout Ratio" is a sign that a company's administration is willing to rewards those who had faith in them. I appreciate both companies who give dividends as well as those that buy back stock to increase the value of the stock that is left

    If you have a list of companies that will buy-back their stock, I'd like to hear about them.

  • Report this Comment On November 09, 2010, at 6:47 PM, modeltim wrote:

    I'll wait for the next crash - the yields should be great. I am too close to retirement and conservative is my game.

  • Report this Comment On November 09, 2010, at 6:57 PM, KietKietKt2010 wrote:

    I'm glad to have bought these except JCI. Should I buy some JCI now?

    Also when should I sell the stocks recommended by the Motley Fools or Morningstas? At what level of "gains" or "loss". With some of the stocks recommended by Morningstar, they usually advise to buy and sell at certain price?

    The banks for the whole year with so little interests have wasted but not lost a great deal of my money. I'd need to seek good dividend and long termed positions, since I may not be comfortable being a "day trader"!

    Any advise. please? Thanks.

  • Report this Comment On November 10, 2010, at 3:48 AM, afamiii wrote:

    The reason that these five companies are good investments is because they have strong competitive advantages, the management has been able to grow the businesses without diluting the return on equity, and management has not wasted the profits on hair brained ideas.

    Being able to pay an increasing dividend is the result of this, not the cause. Microsoft was just as good an investment before it started paying a dividend (or comparing its price performance before and since 2003, it may well have been a better investment before.)

    NPR should model dividend payers vs. non dividend paying quality companies, they will find the difference is marginaly in favour of the non dividend payers (mainly because they include more of the high growth companies.) However, returns to the investor will be much better from the non dividend payers, because the dividend portion of the return will not be taxed.

    Anyway I guess is you don't have time or knowledge to spot competitive advantage, running a screen of companies with the best long term dividend record and the best dividend yields is better than an index fund.

  • Report this Comment On November 10, 2010, at 11:13 AM, sept2749 wrote:

    Great article. Makes it easier for me to sleep at night as I happen to own all but 3m and JCI. I'm also close to retirement but am waiting for a big dip to increase positions. Wish I started 30 years ago!

  • Report this Comment On February 18, 2012, at 1:03 AM, harihari01 wrote:

    I am starting new. How would I allocate my $100 in above stocks.

    Thanks for helping out

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