This Dividend Stock Will Help You Retire

Today's dividend stock is going to come from one of the most unlikely sources: groceries. And though I expect this stock to benefit from a nice dividend bump over the years, it's the stock's price appreciation that will really supercharge returns.

I'm so confident that my pick will outperform the market that, within the next two months, I'll own $4,000 worth of its stock. If, over the course of the next three years, I sell any shares, I'll donate $100 to charity.

This is the fifth article in a series that I'm writing about my retirement portfolio, which I'm dubbing "The Cheesehead Portfolio" in honor of my home state of Wisconsin. If you wish to see my first four selections for the portfolio, check them out:

Three years from now, I fully expect today's pick, Whole Foods Market (Nasdaq: WFM  ) , to handily trounce the market because of its leading position in a growing organic-food trend.

Organics are here to stay
The market for groceries is attractive for two fundamental reasons:

  1. This is an enormous market -- everyone needs food.
  2. The product is always in demand -- ideally, three hearty meals a day for everyone.

From this large and sustainable market, organic foods have started to take up a larger slice of the pie. The move toward healthy organic foods is an undeniable, long-term trend that's here to stay.

Year Total Food Sales Organic Food Sales Organic Penetration
1998  $454,140  $4,286 0.9%
2000  $498,380  $6,100 1.2%
2002  $530,612  $8,625 1.6%
2004  $544,141  $11,902 2.2%
2006  $598,136  $16,718 2.8%
2008  $654,285  $22,900 3.5%
       
CAGR 3.7% 18.2%  

Source: Organic Trade Association. CAGR = compound annual growth rate. Food sales in millions.

Organic food has made steady strides over the years but still claimed just a tiny piece -- 3.5% -- of the entire food-industry market in 2008. That sliver will undoubtedly grow as consumers increasingly educate themselves on where their food comes from.

The best deal in organic food
For years, people have derisively referred to Whole Foods as "Whole Paycheck," with the company's prices seeming to be significantly higher than the competition's. Just how true is that claim?

I live in D.C., and I set out to see how Whole Foods stacked up against the local competition. I visited our local Safeway (NYSE: SWY  ) , Giant, Trader Joe's, and Ruddick (NYSE: RDK  ) -owned Harris Teeter this past weekend, comparing prices for some organic staples.  The results might surprise you.

Store

1 lb. Free-Range Chicken

1 Dozen Eggs, Free-Range

Half- Gallon Organic Milk

1 lb. Organic Strawberries

1 Bunch Organic Broccoli

Total

% More Than Whole Foods

Whole Foods

$5.99

$3.29

$3.29

$3.50

$2.49

$18.56

--

Trader Joe's

$6.99

$2.79

$3.69

$3.29

$3.99

$20.75

12%

Harris Teeter

$10.99

$3.29

$3.29

$3.50

$3.49

$24.56

32%

Safeway

$9.99

$3.99

$3.49

$4.79

$3.39

$25.65

38%

Giant

N/A

$3.49

 $3.69

N/A

N/A

N/A

N/A

Source: author's visits to D.C.-area locations on July 4 weekend. N/A = products were not available.

You can get the same foods in their non-organic form for less at other stores, but when it comes to buying healthy, Whole Foods looks like the cheapest option in D.C. 

Of course, the world is much bigger than D.C., and when time permits, I want to check and see how Whole Foods stacks up against organic offerings at other key rivals, such as Wal-Mart (NYSE: WMT  ) , Kroger (NYSE: KR  ) , The Fresh Market (Nasdaq: TFM  ) , and SUPERVALU (NYSE: SVU  ) . If any of you Foolish readers have these stores near you, let us know about their organic offerings at the end of the article in the comments section.

Financial fortitude
Whole Foods is also a dividend-paying stock. But with its yield of just 0.6%, why would I think it's such a big deal?

Because the dividend is a sign of financial fortitude. 

Back during the financial crisis of 2008, Whole Foods found itself in quite a bind. Profits were drying up, and the company had only $31 million in cash while sporting a long-term debt load of close to $1 billion. 

Today, the tables are turned. The company has $554 million in cash and short-term investments, while the debt load has shrunk by almost 80%, down to $208 million. Should another financial disaster hit, causing consumers to trade down for groceries, Whole Foods is in a much better position to weather the storm.

And even the dividend looks mighty healthy. Last quarter -- the first in which the company has offered a payout in three years -- Whole Foods needed to use only 25% of its free cash flow to give investors their dividend. The rest of that free cash flow can now go toward financing expansion. And once that expansion subsides, Whole Foods will have plenty of room to raise its dividend.

A Foolish takeaway
Whole Foods is a stock that both Tom and David Gardner have recommended in the past for their premium services. But The Motley Fool has recommended many other strong companies. If you'd like access to a report on "5 Stocks The Motley Fool Owns -- And You Should, Too, it's yours -- absolutely free

Fool contributor Brian Stoffel owns shares of Whole Foods and will bring his overall holdings in the stock to $4,000 by Aug. 20. The Motley Fool owns shares of Whole Foods, Wal-Mart, and SUPERVALU. Motley Fool newsletter services have recommended buying shares of Wal-Mart, Whole Foods, and The Fresh Market, creating a diagonal call position in Wal-Mart, and buying calls in SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (4) | Recommend This Article (13)

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 July 05, 2011, at 11:09 PM, GoNuke wrote:

    You are not comparing apples with apples. Whole Foods only sells food that is certified organic. The other chains you mention just offer a small selection of organic foods in order to prevent customers from searching elsewhere for a particular product. Most people who buy organic foods at large chain supermarkets also buy lots of foods that are not deemed organic.

    I eat a lot of organic foods. Relative to the many independent "health food" stores Whole Foods prices are much higher.

    In my experience consumers of organic foods have less disposable income than the average consumer so they shop at small low margin stores.

    Amongst the "eat organic" crowd Whole Foods prices are considered extremely high. They serve a small niche: wealthy people who choose to eat only organic food. If this niche starts to grow then large chain supermarkets will expand their selection of organic food.

    In the meantime the majority of us who eat organic wouldn't be caught dead in a Whole Foods store because only stupid people shop there. :)

  • Report this Comment On July 06, 2011, at 12:48 AM, Riskysam wrote:

    Brian,

    Your article is dead on. Organics are here to stay. I like whole foods as a long term play but I prefer UNFI. UNFI is the largest shipper and distributor of organic foods to whole foods, their competitors and the little grocery stores getting into the organic markets lately.

    They even have their own stores and charge very steep wholesale prices to more than 17,000 customers. The only problem is that they are just not a well oiled machine.

  • Report this Comment On July 06, 2011, at 10:27 AM, TMFCheesehead wrote:

    @ GoNuke-

    While I appreciate your perspective, we'll have to agree to disagree. I think we both think organics are the smarter way to go, and more people are becoming aware of this everyday. What we can't discount, though, is that conveniece is still king. That's the upper hand WFM will have as this trend gets bigger. And though other traditional grocers can try and make moves into the arena, they'll be light-years behind WFM and the relationships they've already established within the organic industry.

    @ Riskysam-

    Thanks for the heads up on UNFI, I'll check them out.

    Brian Stoffel

  • Report this Comment On July 06, 2011, at 6:40 PM, TLassen wrote:

    "This Dividend Stock Will Help You Retire"

    Very good article, but somewhat misleading title.

    The criteria for finding dividend paying companies that will 'help you retire' should be focused on finding profitable companies with high initial dividend yield + growth of dividends; clearly WFM does not cut it. Dividend paying stocks for retirement are those where your investment yield on cost rises above both inflation and 'safer investments' (t-bills)

    With an current yield of 0.6% and an erratic dividend payment history, WFM is not a candidate

    By all means buy WFM for its excellent management of earnings, demonstrated through the growth of book value over the years, but as dividend play, I'll pass thank you.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1515566, ~/Articles/ArticleHandler.aspx, 11/28/2014 2:25:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement