Seed your Portfolio with these Stocks
Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors are probably familiar with the idea that young people can afford more risk. While the idea is certainly sound, it is a mistake to apply it to stocks. First, young people usually do not have a lot of investing knowledge. The lack of knowledge combined with going for a risky homerun stock makes it almost certain that they will lose money on their initial investments.
Second, it is hard to recover from losses. Say an investor loses 50% of his or her money. To break even that person would have to generate a 100% return on his or her remaining money. This is certainly doable for young people, but they permanently lose the compounded interest the other 50% could have earned and their retirement could be set back years.
Investors, especially beginners, are better off investing in low-risk dividend paying stocks that will be around for a very long time. Dividends provide investors with a constant income stream (without selling shares) and allow investors to control how the profits are reinvested. The following companies, in no particular order, are all great companies that pay dividends.
1. The Buckle (NYSE: BKE), Industry: Retail, Dividend Yield: 1.98%, Price: $40.37
The Buckle sells casual clothing, shoes, and accessories in the USA. In the last five years, the company has grown its sales by an annual average of about 15%. This is amazing because the number of stores only increased by 17% over that entire period. From 2007 to 2012, comparable store sales increased by 13.2%, 20.6%, 7.8%, 1.2%, and 8.4%, respectively.
The company has zero debt and has a rate of return (EPS/(Stock Price – Tangible Book Value Per Share)) for the last twelve months of 10%. Rate of return is a good way of estimating the value of a company. Furthermore, the company only has 431 stores in 43 states in the USA. That is about 10 stores per state. It has plenty of room to expand.
2. Southern Copper (NYSE: SCCO), Industry: Metal Mining, Dividend Yield: 6.42%, Price: $31.51
Southern Copper is a metal mining company that mainly produces copper and molybdenum. It operates in Peru and Mexico. Over the last twelve months the company generated a whopping 35.39% net profit margin, 29.91% return on assets, 58.93% return on equity, and 34.15% return on investments. Over the last five years, the company has grown sales by about 4.5% annually.
Most importantly, the company has copper and molybdenum reserve lives of 75 and 100 years, respectively. Therefore, investors can expect similar performances for many years to come. Over the last twelve months, the company had a rate of return of 11%. With a dividend yield of 6.42% Southern Copper makes a great investment.
3. Microsoft (NASDAQ: MSFT), Industry: Technology (Software), Dividend Yield: 2.72%, Price: $29.39
Do not let the rise of mobile devices fool you into avoiding Microsoft. Desktop computers are still essential to getting things done and Microsoft is the king of desktops. Over the last five years (including the recession), the company managed to grow at an average of almost 10% annually. Considering that the company already earns around $20 billion annually, this is remarkable.
Furthermore, Microsoft is looking to conquer the tablet market with Surface. Windows 8 Surface will operate a full Windows OS and will be compatible with legacy Windows programs. Currently, Microsoft has a rate of return of 11.5%. The company has performed consistently and has a great set of established products with Microsoft Office, Windows, and Xbox 360. It will be around for a very long time and makes a great investment.
4. Diamond Offshore Drilling (NYSE: DO), Industry: Oil Well Services, Dividend Yield: 0.79%, Price: $63.35
Diamond Offshore Drilling is an offshore oil and gas contract drilling company. The company is extremely well run. From 2007 to 2012, the company generated a return on average assets (ROAA) of 20%, 28%, 25%, 15%, and 14%, respectively. Diamond Offshore and Atwood Oceanics are the only two publicly traded offshore drilling companies that have generated double digit ROAA over the last twelve months and last five years. ROAA is a very good measure of management efficiency.
Furthermore, the search for oil in the ocean is inevitable because the ocean covers 71% of the planet. Although Diamond Offshore has a relatively old fleet, only 26% of its fleet are jack-ups. This means that the company has a fleet that mostly consists of semisubmersibles and drill ships. These are more versatile and are capable of taking advantage of the inevitable trend to deeper waters. Diamond Offshore has a rate of return of 20%.
5. Valero Energy (NYSE: VLO), Industry: Oil Operations (Refining), Dividend Yield: 2.41%, Price: $24.86
Valero Energy is the largest independent refining company in the USA. The company operates 16 refineries and 10 ethanol plants. Yes, refining is a low margin business. However, Valero is a great investment because oil is essential (currently and for a very long time into the future) and the company is super cheap. Valero has a tangible book value per share of $28.45. This means that by buying the company at $24.86, investors are instantly earning $3.59 per share and getting the earnings power of the business for free. Valero is a profitable company.
Furthermore, if the Keystone Pipeline is completed, Valero will benefit. Valero’s refineries are equipped to handle heavy crude oil and the Keystone Pipeline would provide Valero with easy access to Canadian tar sands.
In conclusion, investors should invest in solid companies and avoid risk because losing money early has a huge impact on later years. As an alternative, investors should invest in great companies that pay dividends. The above companies pay dividends and have room to grow. Most importantly, the investments are low risk and they are either close to fair value or are undervalued.
Alvin owns shares of Microsoft and Valero Energy. The Motley Fool owns shares of The Buckle and Microsoft. Motley Fool newsletter services recommend Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.