Quick test: Which of the following is false?
- The average American's lifespan is nearly 80 years.
- The average large American corporation's lifespan is between 20 and 50 years, depending on the source.
- Dinosaurs still exist, and can be seen roaming throughout Kansas, Nebraska, Iowa, and Rhode Island.
You didn't hear about the T-Rex in Pawtucket?
Oh, OK, we'll fess up: Dinosaurs remain extinct. Which means that an average American outlives an average large-sized American corporation by a factor of two or more.
Two years ago, we wrote a column advocating that investors look for companies with the following four characteristics:
- Built to last for 100 years or more.
- Little-known, yet dominating their growing industries.
- Steered by committed management teams.
- Governed by the highest corporate values.
Little did we realize just how preposterous it is that companies would be built for "100 years or more"! In fact, according to Arie de Geus, author of The Living Company, "a full one-third of the companies listed in the 1970 Fortune 500 ... had vanished by 1983 -- acquired, merged, or broken to pieces."
Professor Jeremy Siegel's meticulously researched book The Future for Investors studied the original firms of the S&P 500, which was put together in 1957. Of those 500 firms, Siegel found, just 25% survived intact to 2003! Over that 46-year span, the other 75% (fully 375 companies) went bankrupt, merged, or were taken private.
That's our advice: Invest in unicorns and sasquatches
This doesn't invalidate our earlier advice -- that you should look to invest in businesses built to last for 100 years or more. If you can do that, after all, you'll align yourself with managers who are thinking long-term, rather than short-term.
It does, however, make an elite group of U.S. businesses stand out even more -- all bearing one shared trait that's almost as unbelievable as unicorns and sasquatches. Before we get to that trait, let's look at that List of Five:
(NYSE:CL). In today's uncertain economy, it recently increased its dividend 10%. It's been paying dividends without interruption since 1895.
(NYSE:ABT). In February, Abbott raised its dividend for the 37th consecutive year; it's been paying a dividend since 1924.
(NYSE:EMR). It's raised its dividend for 52 straight years.
(NYSE:UTX). It's paid a dividend every quarter since 1936.
(NYSE:KMB). It's raised dividends to shareholders for 37 straight years.
These five businesses have far surpassed the average -- each dates back at least 80 years. Even more impressively, each has been paying a dividend more than half a century.
The benefit of dividends to shareholders is clear: You get paid cash each and every year, whether the underlying stock is up, down, or indifferent. Furthermore, you can pocket that cash or use it to buy more shares of stock. Better yet, dividends also benefit the companies that pay them, and we think it's no coincidence that these long-lasting companies are all dividend payers.
That's because dividends -- and the need to consistently pay them, once a company starts paying them -- force companies to be responsible with their cash. In fact, a recent paper by Douglas Skinner and Eugene Soltes of the University of Chicago found that dividend-paying companies have better earnings quality than their non-dividend-paying peers, and that "dividend payers are less likely to report losses" [emphasis added]. And because companies only go out of business when they start losing money, it's clear that companies that don't lose money won't go out of business.
So there's one little secret when you're seeking companies that are being built to last 100 years: Look for stocks that pay dividends.
It's not all joy in Dividend-ville
Of course, there are no sure things, and that's just as true with longtime dividend payers as it is in pro sports. (Nice job, San Jose.) Even worse, the current economic downturn has forced a number of former "dividend dynasties" to diminish or even do away with their dividends. Dow Chemical
Thus, it's as critical now as ever to carefully scrutinize any stock you choose to invest in, and to diversify your portfolio broadly across a collection of superior companies.
If you're interested in doing just that, click here to join our Motley Fool Income Investor service free for 30 days. The dividend fiends there run a model portfolio of their top dividend-stock ideas, and with yields creeping upward recently as the stock market has dropped, their hunting grounds are as fertile as ever.
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This article was originally published March 27, 2009. It has been updated.