I'm about to break down. So far, I've stubbornly stuck to growth companies and small caps for my 2-year-old daughter's portfolio, following the thinking that these are the stocks most likely to explode into portfolio-padding monsters sometime before Leah needs the cash to backpack across Europe, or whatever life detour she'll end up taking to spite me.
But the more I read about dividend investing, the more I'm becoming convinced that I should add some high-yield stocks to my daughter's portfolio. They're less glamorous than, say, Archipelago (AMEX:AX), a Rule Breakers selection that has leapt more than 150% since its February 2005 newsletter recommendation, compared with a 7% gain for the S&P over the same period. And I'm not going to get the rush of investing in a company like Middleby (NASDAQ:MIDD), a small-cap oven maker that has seen its stock price jump more than 400% since it was recommended in the November 2003 issue of Hidden Gems.
Those are both incredible winners, but they come with higher risk, they are both prone to huge swings in both directions, and there are a few companies on both of those newsletters' scorecards that are on the wrong side of the ledger -- Hidden Gems recommendation eSpeed (NASDAQ:ESPD) was sold at a substantial loss, while Rule Breakers selection Shanda (NASDAQ:SNDA) is down more than 50% since its January 2005 recommendation. Since I put some of Leah's money into that one, the risk lesson was even more acute. The winners far outweigh the losers, mind you, but there are potential pitfalls in both those investing styles.
An added bonus
Dividend investing provides no guarantees, of course, but companies that write regular checks to investors just for investing are worth a look. And as Mathew Emmert, our resident dividend expert, says, "... when you buy a successful dividend-paying company, you're buying not just the dividends of today, but also the dividends of tomorrow. So, if you purchase shares in a company that yields 3%, certainly you're locking in a 3% annual yield today, but you're also going to enjoy the dividend growth of tomorrow. So, if your company increases its dividend by 9% annually, you'll have an effective annual yield on your original investment of nearly 11% in just 15 years. That's a double-digit yield on your original investment, and you didn't have to do anything beyond making your initial purchasing decision in order to achieve it."
And the winner is ...
Thus convinced, I'm going to buy my daughter a dividend-payer. And the winner is Popular (NASDAQ:BPOP), the holding company for Puerto Rican and U.S. banking firm Banco Popular.
The company has been beaten down, primarily because of the implosion in shares of Doral Financial (NYSE:DRL), another Puerto Rican company. Doral has suffered from considerable accounting issues, and the company's stock has plummeted. Popular's shares took shrapnel in the crossfire. As Mathew said when he recommended Popular in his Motley Fool Income Investor newsletter service, "This knee-jerk 'sell first, ask questions later' reaction has created an opportunity for us to snatch up a good company at a bargain price."
Popular pays a dividend just below 3%, which means that if I invest $1,000 for Leah, it'll be worth $1,030 in one year, $1,159 in five years if I reinvest the dividends, $1,343 in 10 years, and $1,806 in 20 years, when Leah decides to go to graduate school. And that's assuming that the dividend and the share price stay flat. If we factor in very conservative estimates of 10% growth and an 8% bump in the dividend (lower than the five-year forecasts or historical increases, but it's tricky to run 20 years in advance), that $1,000 investment would turn into more than $8,600 in 20 years, good for a historically market-beating 11.4% annualized gain.
Sure, it's fun to predict the huge winners from the ranks of Rule Breakers or Hidden Gems picks, but it's probably not smart to bet all of my daughter's birthday money on companies that may or may not double or triple in time. With so many investing years ahead of her, Leah has plenty of time to let dividend payers pad her pocket.
To take a free 30-day trial to Income Investor and get a look at all of Mathew Emmert's past picks, just click here.
Roger Friedman is the managing editor of newsletters and the author of Nipple Confusion, Uncoordinated Pooping and Spittle: The Life of a Newborn's Father . His daughter, Leah, owns shares of Shanda. The Motley Fool is investors writing for investors .
