I sent an email to a friend today, rife with my opinions about various stocks, and got sidetracked into a little tangent of my own: whether ’tis nobler in the stock market to suffer the slings and arrows of outrageous fortune’s ups and downs, or to buy small growth stocks which produce dividends against a sea of troubles. (Sorry, Hamlet).
To rephrase, I could go the standard route and buy high-growth stocks and sell them off for a pretty penny when I retire (and then have a pile of cash and no stocks). Or I could buy dividend-producing stocks, which tend to be slower growth. The nice thing about them is, though, that you can set them to automatically reinvest the dividends they pay you – meaning that over time your shares of the stock will multiply (according to the Fool’s Income Investor magazine, $2000 invested in 1980 in Philip Morris – 58 shares at the time – would be worth $300K, or 4,300 shares today).
And the best thing? If you ever decide you’ve got enough of the stock, you can just have the dividends sent straight to you instead of reinvested. A friend-of-an-acquaintance actually lives off dividends like this. He has a modest salary – in the $40K range – but he’s single, doesn’t need to work, and can spend all this time travelling. Sounds good to me. Reeeeeally good.
I’d like to keep my options open and have some of each kind of stock; the question is which. I researched a whole bunch of companies recommended by the Income Investor (no, I haven’t subscribed to the magazine, but these are the companies that they openly endorse) and Stock Advisor and ran them through my calculations and scorecard. The winners were: (click below to see more)
Emerson Electric (EMR): 68% (0.26)
Paychex (PAYX): 74% (0.30)
Pepsi (PEP): 74% (0.38)
Coke (KO): 85% (0.35)
Johnson & Johnson (JNJ): 91% (0.41)
Automatic Data Processing (ADP): 79% (0.23)
American Express (AXP): 73% (0.15)
Quality Systems (QSII): 68% (0.25)
Colgate-Palmolive (CL): 74% (0.36)
Surprisingly, a number of stocks that I already own also pay dividends:
These percentages average in (along with scores given for each healthy financial and subjective analysis point such as familiarity) factors such as a low PE, whether the price is below the 52-week average, whether they were able to stay positive in this bear market, and the dividend per share.
So where to from here? I’m not sure. Of course I’d like to buy ten shares of each right off the bat, but that kind of behavior is for folks that actually have free cash. -grin- So slow we go, one at a time. Right now I’m tempted to invest more money in something I already have, such as PG or UMPQ; but I’m also looking hard at Quality Systems, J&J, ADP, and Paychex.
While J&J and KO have the most solid financials, both may be facing problems. J&J just laid off a huge number of workers. Coke relies solely on its beverage products for income; so when those sales go down so does the whole company, unlike Pepsi, who is actually made up mostly other brands such as Frito-Lay and Tropicana. They do well even when the market for fizzy drinks is down.
GRMN gives the best dividend (.75), but is overpriced right now by 38% according to its 52-week average. It might actually be better to buy 4.4 shares of UMPQ (18 cent div) for the same price as each share of GRMN: those would render about a .79 cent dividend total. On the other hand, GRMN has a track record of tremendous growth, which accounts for its being valued so highly currently.
Paychex is interesting because it has a history of raising its dividends regularly: 87% in the past 10 years.
The price is right on ADP and J&J, and ADP is recommended as one of the Fool’s five new Money Makers – which gives it considerable weight in my opinion.
So yeah, lots of choices, not so lots of money to spend on them all. -laugh- What would you do?