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I kicked off my "multivitamin" real-money 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 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 in a moment.
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, 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 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
A total of 73 companies passed the screen, and I'll post the complete list on my Rising Star discussion board. I can highlight only a few, however, and the energy and railroad sectors stand out for me this month.
Oil-field services is a beaten-down sector that I'm sure will rebound. Halliburton (NYSE: HAL ) , Schlumberger (NYSE: SLB ) , and Tenaris all have strong balance sheets and reasonable forward earnings multiples.
It may seem counterintuitive, but demand for these guys remains strong, and all are expecting double-digit earnings growth on an annualized basis over the next five years. What's more, each has a forward earnings multiple in the 12 to 15 range.
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