The reasons people invest are as numerous as what they invest in, but one of the most common reasons is to invest for the benefit of future generations. Surely we'd all like to plant the seeds of fortune for our children and their eventual orchards of wealth, but investing with such a long time horizon can be a daunting experience.
The best investing quote I've ever read was from Warren Buffett: "The goal is to find companies that will be around for 20 years and offer a margin of safety." Of course, none of us has a crystal ball, but using this mindset, I set out to find three dividend stocks that I believe future generations would thank us for.
Why limit yourself to dividends, you ask? Well, a company's ability to pay a dividend is typically a sign of stability. It also shows a dedication to shareholders and is one of the best ways to build long-term wealth. The following chart tells all.
Since we're investing for our kids here, I only wanted the best of the best. That meant heading straight to the Dividend Aristocrat list. From there I picked three companies with a combined 151-year history of not only paying but also raising dividends. Let's meet the rock stars.
- 3M (NYSE: MMM ) is a $60 billion manufacturer of more than 50,000 products. Its portfolio of goods is highly diversified by both industry and geography, spanning 60 countries and massive sectors including transportation, health care, and consumer goods, just to name a few. It's raised dividends for 53 years, sports a 2.7% yield, and has maintained a sub-50% payout ratio for the past decade. Over the past 20 years it's returned a market-crushing 560%, exactly half of which was the consequence of dividend reinvestments.
And I think 3M is just getting started. It has the enviable quality of achieving higher margins in many of its international markets, which dovetails nicely with the fact that it receives 66% of its revenue from outside the United States, up from 61% in 2005 and 52% in 2009. Its $3.9 billion in free cash flow will surely give it the flexibility to grow by way of acquisitions and new products and reward shareholders at the same time. Its portfolio includes timeless brands including Scotch, Post-it, and Nexcare. Bottom line: This company is here to stay.
- No buy-and-hold dividend list would be complete without Johnson & Johnson (NYSE: JNJ ) . The maker of all-things-health care pays a 3.5% dividend that's been raised for 49 years. With consumer, pharmaceutical, and medical-device segments, Johnson & Johnson is more diversified than its competitors and therefore insulated for the long term. While Pfizer (NYSE: PFE ) is busy worrying about how to keep Lipitor profitable off-patent and build its pipeline, Johnson & Johnson collects revenue from its other two essential divisions.
That doesn't mean it's ignoring patent cliffs, though. The company has one of the industry's strongest pipelines, with oncology, arthritis, and cardiovascular-disease drugs in the works. Like 3M, it's maintained a sub-50% payout ratio for the past decade and almost doubled free cash flow for the same period. With a population that's not getting any younger and a product portfolio that claims the No. 1 or No. 2 spot in most of categories, what's not to love?
- And the last great long-term company? Coca-Cola (NYSE: KO ) and its 3% dividend. The beverage titan is a case study in economic moats, and that moat is only getting wider. The company operates in more than 200 countries and is consistently regarded as the world's most valuable brand. Even despite its massive size, it still managed to grow global volumes by 5% in 2011. The volume improvements coupled with midyear price increases pushed net income 19% higher over 2010.
Think that's a one-off event? Coca-Cola's net profit margin has averaged an industry-leading 21% for the past decade, meaning that $21 out of every $100 in revenue was pure profit.
Many observers claim that the decline in U.S. soda consumption could become a global trend and hurt Coca-Cola, but the company is far more than its namesake beverage. With a portfolio of 3,500 beverages, it's guaranteed to make something for every palate. Beyond that, the company has one of the most comprehensive distribution networks in the world. In fact, it is so far-reaching that rival beverage companies often must sign distribution agreements with Coca-Cola. Because a rival system is prohibitively expensive to build, Coke has ensured that it's here to stay. When writing about Coke in his most recent letter to shareholders, Buffett said he expects its earnings to "increase in 2012, and for that matter, almost every year for a long time to come."
The best of the best
The track records of these three companies attest to their long-term stability, and I'm confident they'll not only be paying but also raising dividends when our kids come of age to reap the benefits. An equally weighted portfolio of these three companies 20 years ago would have returned 549% today. With their moats only getting wider, I think they'll be able to do it again.
If you like the idea of dividends for building future wealth but aren't sold on these three companies, you can always uncover more in our special free report: "11 Incredible Dividends for Your Future." The report is free today, but it won't be forever. You can access your complimentary copy today. Enjoy, and Fool on!