In researching a series of articles, I've had the enviable opportunity to hold lengthy discussions with 34 of the Fool's analysts and advisors over the past two months, learning the companies they like and why. Stepping back and analyzing three notepads full of strategy, numbers, and logic, I've gleaned two key takeaways. Over the course of this article, I'll share those and the one company I plan to buy as a result of their insights.
The first overall lesson is that regardless of our analysts' stated preference, they are preternaturally drawn to companies that pay dividends. It's almost unconscious, but over the course of our casual conversations, well more than half of them mentioned -- unprompted -- the magic and allure of dividends. As a result, their suggestions of companies to watch are littered with companies that pay a handsome yield. They appreciate the idea that select businesses are willing to pay them to invest while also offering the opportunity for capital appreciation. And a strong and growing dividend also is a leading indicator of a company's overall health.
As astute Fool analyst Dan Caplinger wrote, "Dividend payments do signal that a company believes its business is sustainable over the long term. If a company is able to pay money back to shareholder in the form of a dividend, it must be generating enough free cash flow to finance the payouts. And if the company regularly pays dividends, those cash flows must be ongoing and dependable." He points out that a history of dividend payments doesn't guarantee the long-term success of a business -- especially if a company is financing its dividends not from free cash flow, but rather by raising capital through taking on debt, selling assets, or diluting shares. "You shouldn't just assume that any stock that pays a dividend is destined for greatness. But on the other hand, you shouldn't discount dividends entirely, either. Given that dividend-paying stocks have historically outperformed stocks that don't make payouts by a substantial margin, it's clear that for every questionable dividend stock, there are many others that have the goods."
Here's a handful of strong, dividend-paying companies that our top investors think merit a position on your watchlist, if not your portfolio.
Company to Watch
Annual Dividend (Yield)
Analyst/Advisor (and link to the original article)
|Intel (Nasdaq: INTC)
||Head of Analyst Development Buck Hartzell and Million Dollar Portfolio associate advisor David Meier
|General Growth Properties (NYSE:GGP)
||Motley Fool Special Ops advisor Tom Jacobs
|Philip Morris International (NYSE:PM)
||TMF analyst Dan Dzombak
Our second lesson
The second life-changing investing lesson actually comes not from our analysts, but from loyal Fool Steve Beckmeier. In one of my recent articles, I wrote that an analyst I had interviewed was waiting for Apple (Nasdaq: AAPL) to pull back to $300 a share with the expectation that they could easily reach $400 if its deal with Verizon goes through. Steve sent me an email that said in part:
"The Fool is always talking about not timing the market but I also always see comments about waiting for a better price. Isn't that kinda the same thing? Why take the chance of Apple going down $20 if you think it's going to go up $80 from where it is today? Why not just buy at today's price?"
My initial response was that either:
- At a $100 spread between his hoped-for purchase price and his estimate of where it could go, he has an ample margin of safety, but with a smaller spread his money can earn more with a different investment;
- He's established $300 as a psychological anchor, a magic number that signals a buy; or
- It's somewhere in between.
Steve replied quickly. "I subscribe to a few Fool newsletters and have had great success, but I'm always confused when some of the recommendations say to be sure to use a limit order because of the volatility of the stock. Again, this seems similar to trying to time the stock instead of just buying a good stock at a good price. I was lucky enough to get in to Netflix(Nasdaq: NFLX) at $11 and have lots of friends that waited for pullbacks at $40... $50... $75... $125… and never ended up getting in."
And the stock I'm going to buy
That simple email chat, combined with the wisdom of nearly three dozen analysts, has convinced me to make a purchase. The company was high on the watchlist of both Motley Fool Options advisor Jim Gillies and Buck Hartzell, the man who is responsible for the continued development of our analysts. It's the king of its segment and its shares were recently knocked down on news that our analysts feel was overblown. And the company has decided it will pay its first dividend by next July, the end of its current fiscal year. My instinct (as always) was to put it on my watchlist and wait for a pullback, confident that I could make a couple extra bucks when the market puts it on sale.
But Steve has convinced me that if I believe in a company, believe it will pay me to invest with a growing dividend, and believe that it will substantially outperform the market for years if not decades, I should shut up and make the purchase. Therefore, as soon as Motley Fool trading guidelines allow, I'm going to buy shares of network equipment giant Cisco Systems(Nasdaq: CSCO). It's not paying dividends now, but it plans to soon -- and the shares are a bargain I simply can't pass up right now.
If you're looking for dividend-paying stocks that you can believe in, the Fool's recent report on 13 high-yield companies is a great place to start. To get instant access to this report and a raft of outstanding dividend payers, click here -- it's free.
© 2010 UCLICK L.L.C.