Don’t talk to Bill Staton about newfangled investment strategies. His approach to maneuvering through the new decade is no different from what has worked for him and his clients for three decades.
At the heart of that approach are dividends, the cash that a company pays directly to shareholders out of its annual earnings. To be a successful investor, you need to focus not just on big dividends, but on dividend payments that rise every year, which Staton considers an unparalleled predictor of stability and growth. How best to invest in dividend-paying stocks today…
Despite a terrible past decade for stocks, they are the place to be in the next 10 years if you want to make decent investment profits. I expect that tight credit markets and rampant inflation in this decade will be awful for people holding cash and bonds. In fact, during any 10-year period of high inflation (10% or higher), stocks returned an average of about 6% annually, while bonds and cash both lost value.
The trick is finding the best all-weather stocks, because there will be lots of volatility in the years it takes our current economy and financial system to recuperate. The best way to find these companies is to look for businesses that raise their dividends year after year. Rising dividends usually indicate not only that a stock is relatively low risk but also that it has strong growth potential. That’s because the company needs an exceptional track record and robust balance sheet to support ongoing dividend payouts. Of course, in recent years, some companies, especially financial institutions, suddenly found that they could no longer support generous dividends, and their stock prices plunged as much as, or even more than, the overall market. So I am wary of companies that seem uncertain whether they will raise dividends in the coming year.
Even after the 2009 rally — in which stock prices rose 65%, on average, from the low point in March to December 31 you still can find leading high-quality, dividend-paying stocks at reasonable prices, because they underperformed more speculative, lower-quality stocks. If the stock market rally fades, which is very possible, dividend-paying stocks will reduce the pain because they keep providing income.
Here are the seven steps I suggest for perfecting your portfolio…
Over a period of several years, only a few large-cap stocks meet all my requirements and can beat the overall stock market’s returns with less volatility while providing substantial income. Consider building your 2011 core portfolio around these six stocks, which I find especially attractive today…
Becton, Dickinson and Company (BDX) is one of the world’s largest makers and distributors of surgical and laboratory products, such as needles, blades and syringes. It has raised its dividend annually for the past 37 years. A new federal government mandate aimed at reducing infections among hospital patients will help drive sales growth. Recent share price: $75.37. Yield: 2%.
International Business Machines Corp. (IBM) offers systems hardware and software in more than 170 countries. It is well-positioned to take advantage of the advent of “cloud computing,” using distant servers over the Internet for data storage and management to save money for businesses and make them more efficient. Recent share price: $161.60. Yield: 1.8%.
McDonald’s Corp. (MCD). The world’s biggest food chain, McDonald’s dominates the recession-resistant fast-food industry. Its stock actually gained 8% in the 2008 meltdown, and it has been the best-performing Dow industrial stock for the period since 2002, up about 300%. In the next decade, the company’s expansion in high-growth foreign markets such as China, coupled with a weak dollar, will lift the stock price and support the healthy dividend. Recent share price: $76.38. Yield: 3.5%.
Nucor Corp. (NUE). One of the dominant steel producers in the US held up far better than competitors during the global slowdown over the past two years. The company has established itself as the low-cost provider in the steelmaking industry. The urbanization of developing countries will provide robust export revenues in the future. Recent share price: $40.80. Yield: 3.5%.
3M Co. (MMM) manufactures some of the world’s greatest consumer products, such as Scotch Tape and Post-it notes, as well as dozens of other items from liquid-crystal display film to respirator masks. It has been increasing dividends for 51 consecutive years. Recent share price: $92.58. Yield: 2.5%.
United Technologies Corp. (UTX) owns industry-dominating brands, including Otis elevators, Pratt & Whitney engines and Sikorsky helicopters. It currently is kept busy filling a backlog of $60 billion in orders. Recently, it made a key acquisition, picking up General Electric’s security business. Recent share price: $83.03. Yield: 2.3%.
