As dividend-savvy investors know, it's possible to get paid to invest. If you'd been a shareholder of Carnival (NYSE:CCL), McDonald's (NYSE:MCD), Freddie Mac (NYSE:FRE), or Kimberly-Clark over the past 12 months, for example, you would have snagged a yield that surpassed that of the broader market. You'd also have enjoyed stock prices that appreciated faster than the S&P 500 over the period.
Quite the twofer, no?
Johnson & Johnson boasts a market-beating payout, too, and the company is basically a money factory: It's cranked out billions in free cash flow -- cash from operations minus capital expenditures -- over the course of many years. And despite that impressive feat, Johnson & Johnson sports a price-to-earnings ratio that lags that of its typical industry rival.
Anyone up for a bargain-bin special?
Cash is king
"Show me the money" is a time-honored investment principle, but as the recent relative underperformance of Johnson & Johnson indicates, it's no recipe for investment success, at least not in the near term. The near term, alas, can be plagued with volatility, as Mr. Market vacillates -- sometimes on a daily basis -- between money-making stalwarts and racier growth plays.
With that as a backdrop, here's the million-dollar question: Why guess whose turn it is to outperform if you don't have to? You can have it all with world-class mutual funds. Indeed, even a no-brainer like Vanguard 500 Index (VFINX) provides access to all of the aforementioned companies. Procter & Gamble (NYSE:PG), Abbott Laboratories (NYSE:ABT), and United Parcel Service (NYSE:UPS) are in the fund's mix, too.
Thing is ...
As convenient as index funds can be, investing in them exclusively means always having to say you're sorry: Because their fortunes rise and fall with those of their benchmarks, index funds necessarily lag their fee-free bogies, typically by about the amount of their annual expenses.
The good news is that, when it comes to funds, just a little bit of effort goes a long way. Scrutinizing key criteria, such as how a fund has fared in up markets and down -- as well as its price tag -- can help you separate the wheat from the chaff. And while a fund's star-studded performance history may look alluring in a glossy brochure, remember: That track record is meaningful only if it reflects the fund's showing on its current manager's watch.
Contrarian's corner
That's not a "data point" that fund companies typically put front and center in their marketing materials, but it's one that I zero in on each month when making recommendations for the Fool's Champion Funds investment service. Expenses are key, too, as is strategic tenacity -- a manager's willingness to stick with a proven strategy even when it's temporarily out of favor.
That's a good time, after all, for on-the-ball stock pickers to snap up shares of the kinds of companies they like at a substantial discount to their forward-looking prospects.
Speaking of which ...
In our year-end Champion Funds update (2006), we identified the area of the market that sports the most attractive relative valuations, and we zeroed in on a clutch of funds that target that area. We also tapped a group of Grade-A international funds, including one that's racked up a total return of more than 110% since we tapped it for our members.
If you'd like to sneak a peek at that recommendation -- along with all our others -- just click here to take Champion Funds for a risk-free spin and mint some money of your own. These funds have what it takes (and then some) to get the job done.
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This article was originally published on Dec. 19, 2006. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and at the time of publication didn't own any of the securities mentioned above. Johnson & Johnson and UPS are Income Investor selections. You can check out the Fool's strict disclosure policy for yourself.
