I've got a stock tip for you. Three of them, actually. Each of these stocks has been savaged over the past year and, hey, analysts say each of them is at least a double.

Curious? Well, here you go.


Recent Share Price

Analysts' Average Price Target

Potential Upside

Sirius XM Radio (NASDAQ:SIRI)








Blockbuster (NYSE:BBI)




Data provided by Capital IQ, a division of Standard & Poor's.

Great, right? There's just one glaring problem.

I wouldn't recommend these stocks to my worst enemy
You heard me. Look, if you're looking to cash in with big bets on penny stocks (and yes, I realize UAL is technically above the $5 threshold for penny stockdom), you may as well skip the "stocks" part and just buy some scratch-off lottery tickets. At least that way, you'll support local schools while you vaporize your remaining savings.

Sure, these stocks could have huge upside from these levels. My dog could also learn to fetch me a beer from the fridge. Sadly, I'm unable to bank on either. Here's why.

For starters, Wall Street analysts are notoriously inaccurate. The analysts are sheep, dragging their estimates and targets behind the market like a puppy chasing after its owner. Ninety days ago, they thought DryShips (NASDAQ:DRYS) would earn $4.16 a share in 2010. Sixty days ago: $3.02. Now? $0.99. Talk about staying ahead of the curve.

To me, there are some very good reasons why these companies have been hit so hard. Sirius XM has the fiscal responsibility of a first-semester freshman. I'd rather own $0.43-worth of a stake in a local car wash. Blockbuster, whose lunch is getting eaten by Netflix (NASDAQ:NFLX), is suffocating under its own debt load. And I'll believe UAL can achieve consistent profitability just as soon as pigs fly. OK, so these stocks are garbage. Now what? Well, if you're ready to make the leap from a speculator to an investor, read on.

The path to huge returns
Building real wealth doesn't happen overnight, and it certainly doesn't happen by making emotional short-term bets on bad companies. Consider the following:

  • A study published in The Journal of Finance showed that investors who trade most frequently trail the market by 6.5 percentage points annually.
  • According to Wharton's Dr. Jeremy Siegel, portfolios of the highest-yielding stocks returned 4.8 percentage points higher annually, with less risk than baskets of the lowest-yielding stocks, over the years 1958-2002.
  • The list of top-performing surviving S&P 500 members from 1957-2003 is dominated by dividend payers, names like Income Investor "Buy First" recommendation PepsiCo (NYSE:PEP) and recent recommendation Procter & Gamble (NYSE:PG).

In short, the path to building wealth and crushing the market over the long haul doesn't involve day-trading or chasing after the next rocket stock -- just patiently investing in the tried and true. Specifically: Blue chips that pay large, sustainable dividends.

Getting paid to invest
The merits of dividend-focused investing are fairly obvious: The strategy is a proven market-beater over the long run, it comes with lower-risk, and you get paid cash along the way. For perspective, the average yield of the select companies on our scorecard is 5.5%. Compare that to the puny 2.8% yield you can get on a CD.

Of course, you can't just throw darts at a dividend dartboard and hope for the best. You'll want to take a page from our Income Investor  playbook. We look to separate the wheat from the chaff by specifically looking for:

  1. Dividend yields greater than 3%. Again, research shows that stocks yielding above-market rates provide higher returns with lower risk.
  2. Capital gain potential. What can I say? We're a bit greedy. We only recommend companies trading at big discounts to their intrinsic value.
  3. Great management, great returns. We like tenured management teams that have brought home the bacon via long histories of dividend increases and double-digit returns on invested capital.
  4. Durable competitive advantages. Companies with mile-wide moats: unique, sustainable cost advantages; network effects; valuable intellectual property; high switching costs; etc.

Buy great companies. Buy them cheaply. Hold them. Reinvest your dividends. I'd be lying if I said this was rocket science. Still, you'd be shocked at just how few companies make the cut. At best, we think the universe of stocks capable of making the Income Investor grade is only a couple of hundred companies, among the thousands of publicly traded names out there.

Fortunately, Mr. Market has expanded our universe a bit by driving down the shares of first-rate businesses, including my most recent recommendation, Procter & Gamble. The illustrious P&G hasn't yet cracked our elite "Buy First" list, though. To find out which stocks have, and to receive our top new stock idea each month, you can try the service free for 30 days -- just click here to learn more.

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Senior Analyst Joe Magyer owns shares of PepsiCo, but no other companies mentioned in this article. Netflix is a Stock Advisor recommendation, while Procter & Gamble and PepsiCo are both Income Investor recommendations. The Motley Fool owns shares of Procter & Gamble. The Motley Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.