In a private speech to the Financial Planning Association, legendary Vanguard Founder and former CEO John Bogle made an observation that's absolutely critical to understanding where the best stock returns come from -- and how to find the next great stock to buy.

He told the assembled guests that only three things drive investor returns:

  • Dividends
  • Earnings growth
  • Changes in valuation

Historically, stocks have returned 9.6% per year on average -- 5%, 4.5%, and 0.1% from dividends, earnings growth, and valuation changes, respectively. Naturally, the best stocks produce the highest combined return.

So which casinos and gaming stocks will earn investors the best returns today? Obviously, no one knows for sure. You should always take future estimates with a grain of salt, particularly when analyst forecasts are involved. In fact, studies show that analysts' long-term earnings-per-share estimates tend to be over-optimistic by roughly 40%, so I've reduced their estimates accordingly.

But investing is all about making predictions based on imperfect knowledge of the future. So long as we're aware of the need to think critically about a company's prospects and to build a margin of safety into our stock purchases, analyst estimates can be a helpful tool for generating ideas. By running the numbers, we can round up the stocks that represent their implied best buys today. Here are our assumptions:

Company

Dividend Yield (current)

5-Year Growth Rate (reduced by 40%)

Implied Price-to-Earnings Ratio (in 2016)

Melco Crown (Nasdaq: MPEL)

0%

36%

45

Wynn Resorts (Nasdaq: WYNN)

1.3%

30%

38

Las Vegas Sands (NYSE: LVS)

0%

25%

33

Shuffle Master (Nasdaq: SHFL)

0%

15%

24

WMS Industries (NYSE: WMS)

0%

9%

18

International Game Technology (NYSE: IGT)

1.6%

9%

18

Bally Technologies (NYSE: BYI)

0%

9%

18

Source: Capital IQ, a division of Standard & Poor's. Includes stocks on major U.S. exchanges capitalized over $200 million with positive earnings and at least one analyst long-term earnings estimate.

And here are their implied five-year annualized returns for shareholders. I've ordered the three return components by their reliability -- first dividends, then earnings growth, then valuation.

Company

Dividend Return*

Earnings Growth Return

Valuation Return

Implied Cumulative Annual Return

Melco Crown

0%

36%

-6%

30%

Wynn Resorts

2%

30%

-5%

27%

Las Vegas Sands

0%

25%

-3%

21%

Shuffle Master

0%

15%

7%

22%

WMS Industries

0%

9%

4%

13%

International Game Technology

2%

9%

2%

13%

Bally Technologies

0%

9%

2%

11%

Source: Author's calculations. *Assumes dividend growth at rate of earnings growth.

The raw numbers tell us that these are the seven most promising names in casino and gaming stocks. Of course, analyst growth assumptions for any individual company could prove overly optimistic or pessimistic, as could their future valuations. The growth estimates for Melco, Wynn, and Sands seem very aggressive, though the three do have a presence in Macau, a gambling destination that's experiencing remarkable growth. In short, this list should be treated as an excellent starting point of names for further research.

So don't stop here. If any of these stocks interest you, add it to your personalized stock watchlist. If you haven't started one yet, click here to begin.

At the time of publication, Ilan Moscovitz owned shares of Melco Crown. The Motley Fool owns shares of International Game Technology. The Fool has opened a short position in Bally Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.