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My Money Is On This Dividend Stock

Today I'm going to tell you about a gaming company that, within the next two months, I'll be buying into with $4,000 of my own money. I'm so confident that my pick will outperform the market that if I sell any shares within the next three years, I'll donate $100 to charity.

I fully expect today's pick, Activision Blizzard (Nasdaq: ATVI  ) , to handily trounce the market because of its growing online, subscription community.

An out-of-favor industry
From 1997 up until the financial crisis of 2008, it seemed like video game makers could do no wrong. Shares of video game makers Electronic Arts (Nasdaq: ERTS  ) , Take-Two Interactive (Nasdaq: TTWO  ) , and Activision were up an average 1,050% among them.

Then, the carpet was pulled out from underneath them. Since the darkest days of the recession, these three have averaged a gain of 70%. While that might sound impressive, consider that over the same time frame, the S&P 500 is up 95%. As a group, these guys have seriously underperformed the market.

What gives? Well, there are lots of explanations. Fellow Fool Patrick Martin did a great job outlining them in a previous article. It's worth a read, but if you want the abridged version:

  1. Since the recession, consumers are less likely to plop down $50 on the latest game and more than $200 on the latest console.
  2. Some think the advent of social gaming will eat into business.
  3. Gamers are simply fickle. If you haven't produced the next big thing, you'll quickly lose business.

A different approach
So why am I laying down my own retirement money of this stock? It's because Activision is taking a different approach to the gaming industry.

The company, which was formed by the merger in 2008 of Activision and Blizzard, already has a subscription model in place that makes revenue far more reliable and less lumpy then the average company that sells games off the shelves.

The Blizzard division -- maker of World of Warcraft, StarCraft, and Diablo -- is the leader in massively multiplayer online role-playing games, or MMORPGs. If you're not a gamer, you might not appreciate what Blizzard has accomplished here, but consider this: World of Warcraft has more than 11 million subscribers worldwide paying monthly fees.

And now, the Activision side -- which traditionally made games that were sold off the shelves like the Call of Duty franchise -- is entering the subscription realm as well. When Call of Duty: Modern Warfare 3 launches in November, Activision will also roll out Call of Duty Elite, a community-based platform that improves game play across all of the franchise's most recent installments. Many gaming features will be free, though Elite will reserve its best features for premium subscribers.

China
Activision isn't willing to rest on its domestic laurels either. As The Wall Street Journal pointed out, China's online gaming market is expected to represent half of all gaming revenues by next year. That's an enormous opportunity.

Of course, becoming the leader in China won't be a cake walk. Internet portal company Sohu.com (Nasdaq: SOHU  ) already has created its own online games unit, Changyou (Nasdaq: CYOU  ) . And Chinese media company Shanda Interactive has also rolled out its very own Shanda Games (Nasdaq: GAME  ) to capitalize on the opportunity. So far, results have been mixed for these endeavors.

Activision decided the best way to enter China was through a strategic partnership with NetEase (Nasdaq: NTES  ) . NetEase hosts World of Warcraft for Activision in China. The move has worked out well for both parties, as the ongoing relationship earned NetEase the right to host Starcraft II, which launched in April, and the company could be on track to bring the popular Call of Duty game to China's online world.

Financial fortitude
Finally, Activision is in excellent financial shape. Though some may consider the company's 1.4% dividend yield to be puny, I think there's tons of room for the dividend to grow as the company matures. Currently, only 39% of earnings are used to pay the dividend, the company is sitting on $3.36 billion in cash, and has absolutely no debt. I'll take numbers like that any day for my retirement portfolio.

Foolish takeaway
This is the seventh 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'd like to see my first six selections for the portfolio, check them out below.

But if you want a second opinion on stocks for your retirement account, 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 Activision Blizzard and will bring his overall holdings in the stock to $4,000 by Aug. 20. The Motley Fool owns shares of Activision Blizzard and Take-Two Interactive Software. Motley Fool newsletter services have recommended buying shares of Sohu.com, Activision Blizzard, NetEase.com, and Take-Two Interactive Software. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. 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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