How do you get rich in the stock market? Most people look to growth stocks for big gains. And that strategy makes enough sense. These companies usually offer a game-changing product or service most of the world will eventually want to buy, after all. These stocks are often worth their premium price.
It's a mistake, however, to believe you can't become rich with slower-growing value stocks. Between these companies' dividends and predictable, consistent performance, exercising enough patience with these investments often pays off in the end.
On that note, here's a closer look at three great values stocks that -- given enough time -- could turn even a modest amount of money now into a surprisingly large amount down the road.
Coca-Cola
Priced at more than 20 times its past and projected earnings, shares of Coca-Cola (KO) certainly test the limits of qualifying as a value stock (which are usually much cheaper).
In this instance, the growth-like premium is justified by the company's stunningly reliable results. Consumers might balk at buying a new pair of shoes or purchasing a new car. They rarely think twice about paying for their favorite beverage, however. Such brand loyalty is a testament to how well Coca-Cola has marketed its product over the years.
And it's not just its namesake cola. The Coca-Cola Company is also the name behind Dasani water, Gold Peak tea, Minute Maid juices, Powerade sports drinks, and more. It's got something to suit every need at any given time.
Coca-Cola stock's key selling point, however, isn't its product lineup. It's the company's operational structure. At one point Coca-Cola wasn't just brilliant at branding. It was also a major bottler of its own goods, operating many facilities in the U.S. as well as abroad. But beginning in 2014 the organization began selling its bottling operations back to more localized owners so it could better focus on what it does best. That's marketing the product and licensing its flavors, collecting royalties in return.
This means much less revenue, but measurably more profit. As it turns out, licensing and franchising is a higher-margin business than bottling and distributing. That's why the company's more profitable than it's ever been even though it's technically smaller.
KO Revenue (Quarterly) data by YCharts
More important to shareholders, this reliable flow of profits better supports the already strong dividend. Coca-Cola's 61-year streak of annual dividend increases is apt to be extended into the distant future, yet the company's got more than enough cash flow to continue making dividend payments as well as continue investing in its own growth.
Bank of America
There's nothing particularly special about Bank of America (BAC -0.21%) -- it more or less looks like all of its banking peers. That's OK, though. The banking business is a resilient one, and so is BofA.
Of course, veteran investors with good memories might disagree. Bank of America is one of several banks that dramatically cut its dividend in the wake of 2008's subprime mortgage meltdown, and it didn't even begin restoring it until 2014. The circumstances then were extraordinary and unexpected, however.
Bank of America isn't slipping into that same sort of trouble again even if the lending market is starting to show some cracks. As of the third quarter of the year, the company's loan charge-offs are leveling off at 0.35% of its entire loan portfolio. The absolute amount of loan charge-offs is also still growing, but this growth is slowing down every quarter as well. Ditto for its 30-day and 90-day credit card delinquencies. It's going to be fine.
Still, that's not the crux of the reason this stock could make you rich (and make today's newcomers especially wealthy). Bank of America shares are an especially compelling prospect right now because the steep sell-off since early last year has made them a fantastic value proposition.
The stock's priced at a trailing-12-month price-to-earnings ratio of 8.4 and a similarly low forward-looking price-to-earnings ratio of just above 9. And BofA shares' 40% pullback from their early 2022 peak has also pumped up its dividend yield to 3.2%. Both measures are better than the average for banks of its size. You may want to act while you can still wade in at these levels.
Cisco Systems
Last but not least, consider stepping into networking giant Cisco Systems (CSCO -0.50%) if you've got $1,500 (or more) and you're on the hunt for a value stock.
It's a bit unusual to see a technology name like Cisco categorized as a value stock. But it's a legitimate call. Cisco shares are priced at less than 15 times their trailing earnings, and right around 12 times the company's projected per-share profits.
The trade-off for this low price is growth -- there's just not a great deal of it. This year's expected top-line growth of 1% should accelerate to nearly 3% next year, which is roughly in line with its long-term norm. That's the sort of slow growth consumer staples names like Procter & Gamble or General Mills typically report.
Yet, what this company may lack in growth firepower it more than makes up for in consistent progress. That consistency is only set to solidify going forward.
You likely know Cisco as the titan of the router, switch, and networking market. Technology market research outfit IDC reports Cisco controls on the order of 40% of the router and switch market, in fact, keeping it the single-biggest name in the business.
The business is changing, however. As technology improves, more can be done with these switches and routers to better manage and even protect connections. Namely, software can now be installed and updated on this networking equipment, including cybersecurity software. Cisco offers such software to be used in conjunction with its hardware.
That's not the compelling detail for interested investors though. What's so compelling is how it's sold. Cisco rents these software solutions, generating recurring revenue from customers who are familiar with its platforms when it comes time to replace or update hardware. The company did $4.4 billion worth of this software-as-a-service business during the quarter ended in October -- and $6.5 billion worth of subscription business during the same three-month stretch.
This pushes its annual recurring revenue run rate up to $24.5 billion. Software and service subscriptions now account for nearly half of Cisco's top line. But given the company's plan to "offer more recurring revenue-based offerings," it's arguable that it will eventually evolve into even more of a cash-flow juggernaut.
This reliable cash flow, of course, supports Cisco's dividend. Although more technology stocks are paying them these days, few tech names are offering anything near Cisco's dividend yield of 3.3%. As is the case with Coca-Cola and Bank of America, the most productive thing to do with those dividends is use them to buy more shares of the stock paying them.
