Best Stocks for the Long Haul

This article is part of our Rising Star Portfolios series.

I kicked off my multivitamin Rising Star portfolio by buying a stock that I hope will anchor my portfolio for decades to come. Only a "corporate El Dorado" would fit the bill, and in my case, that turned out to be Coca-Cola. Each month I'll be running my screen in order to 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, Abbott Labs, Bristol-Myers Squibb, and Tootsie Roll Industries, as well as 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 among 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 and Wrigley have strong moats because of products that 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.

I'll start the screening with all companies on major U.S. exchanges with a dividend yield of at least 1%. Here are the rest of our 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 74 passing companies on our discussion board, but here are several that fit the corporate El Dorado profile:

Company

Market Cap (in millions)

Debt/Capital

 5-Year Growth (projected)

Dividend Yield

Southern Copper (NYSE: SCCO  )

$29,793

41%

23%

6.6%

Freeport-McMoRan Copper & Gold (NYSE: FCX  )

$52,216

23%

12%

1.8%

Qualcomm (Nasdaq: QCOM  )

$99,103

5%

14%

1.5%

Intel (Nasdaq: INTC  )

$122,423

5%

11%

3.6%

Johnson Controls (NYSE: JCI  )

$28,814

29%

18%

1.5%

Abbott Laboratories (NYSE: ABT  )

$82,890

43%

9%

3.6%

Honeywell International (NYSE: HON  )

$46,859

39%

17%

2.2%

Source: Capital IQ, a division of Standard & Poor's.

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've also added Abbott Labs and other El Dorados to my Rising Stars portfolio -- which is progressing nicely. You can keep up with my buys and sells and all my meandering ruminations on Twitter.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Fool analyst Rex Moore sometimes ruminates on rheumatism. He owns no companies mentioned here. The Motley Fool owns shares of Qualcomm, Coca-Cola, Altria Group, Abbott Labs, and Intel, and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Intel, and Abbott Labs, as well as creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. 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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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 12, 2011, at 3:52 PM, steveonyx wrote:

    Nice. I like seeing Qualcomm in that list. That is the only company out of the 7 in the chart that I regularly trade. I've made great money off of Qualcomm and expect to continue making money off of this well managed company.

    Great products, a leader in the space, and excellent focus on the shareholder.

    Check out the money that I've made trading this stock: http://onyxinvesting.com/trade-history/trading_history_qcom_...

    I hate seeing the dip in price today that was caused by Microchip's poor earnings. I can't wait for Qualcomm to announce another great quarter.

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