Wednesday, May 4, 2011

Six Dividend Stocks to Hold Forever

There are several characteristics that define the best dividend stocks out there. First some of the best dividend stocks have solid competitive advantages, and as a result competitors are having a difficult time replicating the company’s products and business model. Wal-Mart (WMT) operates so many stores, that they are able to deliver the lowest prices for consumers basically due to their sheer scale and constant investment in technology in order to improve processes.

Second, most of the greatest dividend stocks have strong brands, for which consumers are willing to pay a premium. After all, when consumers purchase toothpaste, they want to buy the brand they are familiar with, since teeth are important to most people. As a result someone who cares about their teeth would likely keep purchasing Colgate-Palmolive (CL) products.
Companies which have wide moats and strong brands essentially have great competitive advantages. If these products or services are durable and leave consumers hooked on them, then this only adds to the competitive advantage of such companies. McDonald’s (MCD) creates a long lasting impression on little kids with their Happy Meals, the toys and the atmosphere. They are cultivating their future customers today, knowing these customers will keep coming for decades and bringing revenue in the process. People rarely change their tastes, which is why someone who likes McDonald’s burgers would probably keep spending their money at the golden arches.

The companies with the above characteristics are able to not only have a stable market for their products or services, but also a loyal fan base which is willing to pay the right price for the right product or service. As a result, some of the best dividends paying companies are able to pass on price increases to the consumer, which ensures that they maintain their profitability. As a result inflation is not a major obstacle to such conglomerates. This also helps these companies generate a rising stream of earnings, which fuels future dividend growth.

It is important however to avoid overpaying for dividend stocks, as this could lead to subpar performance for the first few years of the long term investment. This could cause the investor to doubt their investing skills, and would increase the likelihood that they would sell at an unfortunate time. Sometimes what separates the winners from the rest of the pack in the world of dividend investing is the psychological factor.

The six stocks which investors could hold forever, until proven otherwise, include:

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company has raised dividends every year since it was spun-off from Altria (MO) in 2008 and yields 3.70%. (analysis)

McDonald'’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company has raised dividends for 34 consecutive years and yields 3.10%. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrat has raised dividends for 37 years in a row and yields 2.70%. (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend champion has raised distributions for 48 years in a row and currently yields 2.80%. (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company has consistently raised dividends for 54 years in a row and currently yields 3.30% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company has reward investors with higher dividends for 49 consecutive years and currently yields 2.80%. (analysis)

It is important to realize that certain factors such as a dividend cut could cause a stock to be marked as a sell. Given the strong earnings power of the above companies however, this should not be an immediate issue for long term investors.

Full Disclosure: Long PM, MCD, WMT, CL, PG, KO

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