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In a previous job, I helped manage large individual-investment portfolios. Some were nine-figures large. The biggest investing lessons I took from studying those successful portfolios are: Buy dividend-paying stocks and, most importantly, buy them early.
See, these portfolios contained long-term winners like Johnson & Johnson (JNJ, news, msgs), which, in most instances, had been bought decades earlier and by then were paying their holders tens of thousands of dollars in dividend income.
The portfolio owners didn't just pick stocks like J&J out of a hat of blue chips and hope for the best. No, they took the time to select companies with sustainable business models and long track records of increasing shareholder value through capital gains and dividend growth.
That extra effort to pick the perfect dividend stocks paid off, to say the least, and the investors were reminded of their wise decisions when the quarterly dividend checks rolled in.
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Not all dividend stocks are created equal, however. Witness the recently slashed dividends from financial companies like Washington Mutual (WM, news, msgs) and Wachovia (WB, news, msgs), which serve as reminders that dividend payments are not guaranteed. That's why it pays to study a company's free cash flow and payout ratio to make sure it can continue to pay dividends.
But before we get into that, we'll enlist the 97,000 participants in the MSN CAPS community and a new CAPS stock screener tool to identify dividend-paying stocks worth additional research. We'll screen for stocks with:
- Return on equity of 10% or more.
- A dividend yield of 3% or more.
- A four- or five-star CAPS rating.
Here are a few of the stocks our effort uncovered:
| Company | Sector | Dividend yield (on April 18) | CAPS rating, out of 5 |
|---|---|---|---|
Real estate investment trust | 4.0% | **** | |
Trash disposal, recycling | 3.1% | ***** | |
Food wholesale | 3.1% | **** | |
Staffing and outsourcing | 3.3% | ***** | |
Telecommunications | 3.9% | ***** |
At a recent industry conference, Sysco (SYY, news, msgs) CEO Richard Schnieders told his audience, "We do better in more challenging times." Wall Street analysts agree. Despite rising food prices, consumer belt-tightening and other recessionary indicators, analysts expect Sysco's earnings to accelerate over the next five years.
How can this be? For one, the company has a wide moat protecting its spot at the top of the food-service and wholesale-distribution sector. According to Sysco's most recent 10-Q, the company serves "about 15% of an approximately $225 billion annual market."
A 15% market share may not sound like a lot, but wholesale food service is a highly fragmented industry. This economy-of-scale advantage, and the company's vast distribution network, allow Sysco to do a superior job of keeping costs in check.
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I don't see that trend changing. In its fiscal year ended June 30, 2007, Sysco paid out just 55% of its free cash flow and 44% of its earnings.
Over on CAPS, investors are upbeat about the stock. Of the 474 players who have rated Sysco, 443 think it will outperform the Standard & Poor's 500 Index ($INX).
CAPS player "nemaline" recently argued that Sysco's top-dog industry status will keep it ahead of the competition, noting that it is the "market leader with a near monopoly and incredible distribution system. Despite fuel costs, this market drop provides an excellent opportunity to get into this dividend stalwart."
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A cut belowSysco chief Richard Schnieders says the food wholesaler thrives in tough times by helping its restaurant-business customers cope with tenacious food-price inflation.
"I don't see Sysco as having been a great investment to begin with," the CAPS participant wrote last fall. "Over the past five years, capital appreciation is essentially non-existent. According to my Yahoo price chart, the stock price was just a notch above $30 five years ago. Today it sits at about $33. Pathetic. I suppose the somewhat meager dividend is the only redeeming feature."
Sehawk99 has a point -– Sysco shares today trade at a tad above $31.
The company's history of slow growth would change, though, if management comes anywhere near to achieving the analysts' estimates of 13% annualized earnings growth over the next five years. Interested investors should tune into Sysco's earnings reports to see if it moves forward or just plods along as usual.
What do you think? Will Sysco prove the bears wrong and provide dividend riches for patient investors? Or will it succumb to higher food prices? CAPS' 97,000 investors are waiting to hear what you think. Sign up today -- CAPS is 100% free.
This article was reported and written by Todd Wenning for The Motley Fool. At the time of publication, he owned none of the stocks mentioned.
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