Today's dividend stock is going to come from one of the most unlikely sources: groceries. And though I expect this stock to benefit from a nice dividend bump over the years, it's the stock's price appreciation that will really supercharge returns.
I'm so confident that my pick will outperform the market that, within the next two months, I'll own $4,000 worth of its stock. If, over the course of the next three years, I sell any shares, I'll donate $100 to charity.
This is the fifth article in a series that I'm writing about my retirement portfolio, which I'm dubbing "The Cheesehead Portfolio" in honor of my home state of Wisconsin. If you wish to see my first four selections for the portfolio, check them out:
- My Money Is On This Hot Stock
- My Money Is On This International Dividend Stock
- My Money Is On This Company's Management
- My Money Is On This Dividend Stock
Three years from now, I fully expect today's pick, Whole Foods Market
Organics are here to stay
The market for groceries is attractive for two fundamental reasons:
- This is an enormous market -- everyone needs food.
- The product is always in demand -- ideally, three hearty meals a day for everyone.
From this large and sustainable market, organic foods have started to take up a larger slice of the pie. The move toward healthy organic foods is an undeniable, long-term trend that's here to stay.
| Year | Total Food Sales | Organic Food Sales | Organic Penetration |
|---|---|---|---|
| 1998 | $454,140 | $4,286 | 0.9% |
| 2000 | $498,380 | $6,100 | 1.2% |
| 2002 | $530,612 | $8,625 | 1.6% |
| 2004 | $544,141 | $11,902 | 2.2% |
| 2006 | $598,136 | $16,718 | 2.8% |
| 2008 | $654,285 | $22,900 | 3.5% |
| CAGR | 3.7% | 18.2% |
Source: Organic Trade Association. CAGR = compound annual growth rate. Food sales in millions.
Organic food has made steady strides over the years but still claimed just a tiny piece -- 3.5% -- of the entire food-industry market in 2008. That sliver will undoubtedly grow as consumers increasingly educate themselves on where their food comes from.
The best deal in organic food
For years, people have derisively referred to Whole Foods as "Whole Paycheck," with the company's prices seeming to be significantly higher than the competition's. Just how true is that claim?
I live in D.C., and I set out to see how Whole Foods stacked up against the local competition. I visited our local Safeway
|
Store |
1 lb. Free-Range Chicken |
1 Dozen Eggs, Free-Range |
Half- Gallon Organic Milk |
1 lb. Organic Strawberries |
1 Bunch Organic Broccoli |
Total |
% More Than Whole Foods |
|---|---|---|---|---|---|---|---|
|
Whole Foods |
$5.99 |
$3.29 |
$3.29 |
$3.50 |
$2.49 |
$18.56 |
-- |
|
Trader Joe's |
$6.99 |
$2.79 |
$3.69 |
$3.29 |
$3.99 |
$20.75 |
12% |
|
Harris Teeter |
$10.99 |
$3.29 |
$3.29 |
$3.50 |
$3.49 |
$24.56 |
32% |
|
Safeway |
$9.99 |
$3.99 |
$3.49 |
$4.79 |
$3.39 |
$25.65 |
38% |
|
Giant |
N/A |
$3.49 |
$3.69 |
N/A |
N/A |
N/A |
N/A |
Source: author's visits to D.C.-area locations on July 4 weekend. N/A = products were not available.
You can get the same foods in their non-organic form for less at other stores, but when it comes to buying healthy, Whole Foods looks like the cheapest option in D.C.
Of course, the world is much bigger than D.C., and when time permits, I want to check and see how Whole Foods stacks up against organic offerings at other key rivals, such as Wal-Mart
Financial fortitude
Whole Foods is also a dividend-paying stock. But with its yield of just 0.6%, why would I think it's such a big deal?
Because the dividend is a sign of financial fortitude.
Back during the financial crisis of 2008, Whole Foods found itself in quite a bind. Profits were drying up, and the company had only $31 million in cash while sporting a long-term debt load of close to $1 billion.
Today, the tables are turned. The company has $554 million in cash and short-term investments, while the debt load has shrunk by almost 80%, down to $208 million. Should another financial disaster hit, causing consumers to trade down for groceries, Whole Foods is in a much better position to weather the storm.
And even the dividend looks mighty healthy. Last quarter -- the first in which the company has offered a payout in three years -- Whole Foods needed to use only 25% of its free cash flow to give investors their dividend. The rest of that free cash flow can now go toward financing expansion. And once that expansion subsides, Whole Foods will have plenty of room to raise its dividend.
A Foolish takeaway
Whole Foods is a stock that both Tom and David Gardner have recommended in the past for their premium services. But The Motley Fool has recommended many other strong companies. If you'd like access to a report on "5 Stocks The Motley Fool Owns -- And You Should, Too, it's yours -- absolutely free.
