You asked, we answered! On The Motley Fool's Twitter feed, we recently invited readers to send us their burning financial questions. (Don't worry; we had a fire extinguisher standing by.) In response, Foolish follower @LadyFox7Oaks asked:
I'm just starting, know little, have about $500, and want a solid stock with dividends as my first. What should I look for?
We've put that question to an all-star team of Fools from across the investing spectrum, and asked them to suggest one dividend-paying stock that might be a great place for new investors like LadyFox7Oaks to start. Keep in mind that these aren't ironclad recommendations -- just suggestions to kick-start your own further research.
John Rosevear, Fool contributor
Here's what I think a beginner's dividend stock should look like:
- Easy to understand. It's obvious how the company makes its money. The risks and dynamics of the business are straightforward.
- Well-run. Management is on the ball and taking advantage of growth opportunities. Long-term debt is low or nonexistent.
- Good, sustainable dividend. "Sustainable" is key -- you want to collect that good dividend next year, too.
- History of raising dividends. A stock with a history of raising dividends will tend to see its price rise over time, as investors pay for growth.
With all that in mind, take a look at PepsiCo
PepsiCo's dividend yield is a bit more than 3% at current prices. That's not flashy, but it's good -- and PepsiCo has raised its dividend every year for the past 38 years, so you're likely to get a more cash as you hold the stock over time. Add in recession-resistant products, low debt, a huge moat, and significant global growth opportunities, and this one looks like a strong choice.
Jim Mueller, Fool financial editor
What would I recommend as a first dividend-paying stock? A company with repeat customers, lots of cash flow that can be sent to the owners, and a steady history of increasing the dividend. Cigarette giant Philip Morris International
Alex Dumortier, Fool contributor
In looking for a good dividend stock for a beginning investor, I wanted to meet the following criteria:
- Dividend yield at least one percentage point higher than that of the S&P 500.
- Operating in a defensive industry. I like stable, defensive businesses in the best times, but I find them particularly attractive in a recovery that may not be self-sustaining.
- Shares significantly less volatile than the broad market. Volatility tends to deter beginner investors; lower volatility helps them "stay the course."
- Reasonably valued. Overpaying for shares is an excellent way to fritter away your money -- regardless of how high the dividend yield is.
Branded consumer-products giant Procter & Gamble
Furthermore, the shares are about half as volatile as the S&P 500, and although they don't look massively undervalued right now, I calculate that investors can reasonably expect an annualized total return of 12%-13% over the next three to five years. Those aren't eye-popping returns, but in a world in which the broad market will barely keep pace with inflation, those numbers start to look pretty attractive, indeed.
Nate Parmelee, co-advisor, Motley Fool Global Gains
If you're just starting out and want dividends to play a major role in your portfolio take a look at Kraft Foods
A growing dividend is just as important as a consistent one, and Kraft has you covered here, too. Its recent Cadbury acquisition diversified its revenues and gave Kraft a bigger share of global chocolate sales. More importantly, it improved Kraft's growth prospects by increasing its sales outside of the U.S., especially in faster-growing markets in Latin America and Asia. With 10-year U.S. Treasuries yielding just 3.2%, the combination of a safe 4% dividend yield and improving growth prospects is about as close as you can get to a slam dunk for long-term investors.
Editor's note: Nate also wanted to make sure we gave his awesome @TMFGlobalGains Twitter feed a shout-out.
Charly Travers, associate advisor, Motley Fool Million Dollar Portfolio
Brand new investors should build the foundations of their portfolio first with robust, durable companies that pay dividends. Someone looking to seed their portfolio with such a company right now would have a hard time finding a company more attractive than Coca-Cola
Anders Bylund, Fool contributor
The principle of buying low and selling high applies to dividend investing, too. Find a cheap stock with a solid dividend history and great fundamental finances, and you'll get dividend returns on the investment that will make every money market account green with envy. Right now, I can't find a better example than oil giant BP
Dan Caplinger, Fool contributor
With just $500 to invest, I'd recommend that a beginning investor start with an exchange-traded fund that focuses on dividend stocks, rather than picking a single company. The Vanguard Dividend Appreciation ETF
Admittedly, a single stock would provide you with an opportunity to take a more in-depth look at a particular company. But choosing an ETF not only reduces your risk, but also gives you a starting point to find promising individual stock ideas as your portfolio grows. Once you're more familiar with investing, and you want to use all of the investing skills you'll develop in the coming months, you can feel more comfortable choosing individual stocks to add to your portfolio.
We want your questions!
Thanks to LadyFox7Oaks and all the other Foolish tweeters who sent us financial questions. We'll be answering more in the days to come. Want to add yours to our to-do list? Tweet us @TheMotleyFool, or leave a comment in the box below.
The Fool owns shares of Coca-Cola and Procter & Gamble. Coca-Cola is a Motley Fool Inside Value pick. Coca-Cola, PepsiCo, and Procter & Gamble also got the nod from Motley Fool Income Investor. Philip Morris International is a Motley Fool Global Gains selection. Motley Fool Options has recommended a diagonal call position on PepsiCo. Try any of our Foolish newsletters free for 30 days.
Nate Parmelee owns shares of Kraft, and Jim Mueller owns shares of Philip Morris International, but none of the other Fools featured here hold any financial position in the companies they wrote about. Fool online editor and lead Tweeter Nathan Alderman doesn't own any of these stocks, either. The Fool's disclosure policy really pays off.