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.
I'm also tracking and scoring each one of my monthly screens now, so we can see exactly how they're performing. More on that later.
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 stock prices head back up, 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, 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 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 the type of companies you'd expect, along with a few lesser-known businesses. I'll put the full list of 70 stocks on my discussion board and highlight just a few here.
Take caution with Walgreen (NYSE: WAG ) , which is facing falling sales after it failed to come to a contract agreement with Express Scripts. The pharmacy benefit manager accounted for about $5 billion in annual business for Walgreen. However, word that Express' proposed $29 billion buyout of rival Medco Health is hitting regulatory headwinds has Walgreen's stock rallying this week. A play on Walgreen seems speculative until this mess is all sorted out.
There weren't any tech companies on Siegel's all-time list, but, then again, there weren't many around in 1957. Intel (Nasdaq: INTC ) and Microsoft (Nasdaq: MSFT ) both passed my screen, and are about as stable as it gets in this sector. I'd give either serious consideration if you want tech exposure, or, for a bit more safety, buy a half-position of both.
PotashCorp (NYSE: POT ) produces and sells fertilizer. Production cuts and falling crop prices have the industry in somewhat of a funk, and Potash's price is well down over the past few months. But with the bad news priced in, rising demand in developing nations may be a good catalyst to get the industry moving forward again.
With its 5% yield, Enterprise Products Partners (NYSE: EPD ) offers an intriguing opportunity. This "midstream energy" company provides services to both producers and consumers of natural gas liquids, crude oil, etc. It's a master limited partnership, which has its advantages and disadvantages, as laid out here by fellow Fool Dan Dzombak.
To follow along with the El Dorado screen's performance, make this CAPS profile one of your favorites. Every new passing company will be entered as a "buy," and those dropping off the screen will be sold in the CAPS account. That doesn't represent the way we would normally buy and sell stocks; you can see that in my actual portfolio. But this methodology should let us use CAPS to give us an idea of the effectiveness (or lack thereof) of this screen.
If you're interested in any of the companies I discussed, add them to your very own watchlist by clicking below.
- Add Walgreen to My Watchlist.
- Add PotashCorp to My Watchlist.
- Add Microsoft to My Watchlist.
- Add Intel to My Watchlist.
- Add Enterprise Products Partners to My Watchlist.