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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.
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 such as 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 and 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 the criteria:
- Market cap greater than $20 billion.
- Total debt-to-capital ratio less than 60%.
- Average annual earnings-per-share growth over the past 10 years greater than 5%.
- Projected annual earnings-per-share growth over the next five years greater than 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 76 passing companies on our discussion board, but here are several that fit the corporate El Dorado profile:
Market Cap (in millions)
Debt / Capital
5-Year Growth (projected)
|CSX (NYSE: CSX )||$22,004||49%||15%||2.4%|
|Novo Nordisk (NYSE: NVO )||$53,978||4%||15%||1.9%|
|Teva Pharmaceutical (Nasdaq: TEVA )||$32,744||21%||11%||2.6%|
|Walgreen (NYSE: WAG )||$30,250||14%||11%||2.7%|
|United Technologies (NYSE: UTX )||$64,937||32%||13%||2.7%|
|Total (NYSE: TOT )||$107,431||34%||7%||6.5%|
|3M (NYSE: MMM )||$52,378||24%||13%||3.0%|
Source: S&P Capital IQ.
If you don't have any corporate El Dorados in your own portfolio, this is a good list to start your research. You can add any of them to your free, personalized watchlist by clicking here.
Since the Coke purchase, I've also added Abbott Labs and other El Dorados to my Rising Stars portfolio. 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).