What makes a good dividend stock? Every dividend growth investor is looking for a stock that will increase its dividend each and every year at a rate that makes the stock a better investment than fixed income alternatives. I have found that stocks that are able to do this share some common characteristics.
Brand Recognition/Low Price
During an economic downturn consumers may flee many popular brands if their cost is high and generic alternatives are substantially cheaper. Procter & Gamble Co. (PG) [Analysis] has seen this occur in some of their premium brands like Pampers and Tide. However, most people aren’t willing to save a few pennies on a generic soda of unknown quality when a Coca Cola Co. (KO) [Analysis] or Pepsico Inc. (PEP) [Analysis] is available.
In addition to Brand Recognition/Low Price some companies also provide convenience. If you have been out shopping all day and are tired, you are likely to stop on the way home and pick up something that is quick and inexpensive. There seems to be a McDonald’s (MCD) [Analysis] on every corner. A stop there provides the guest with a known commodity – clean restrooms, quick service and an inexpensive meal.
A Superior Operating Model
How do you compete with a company like Wal-Mart (WMT) [Analysis]? As most of their competitors have learned, you can’t beat WMT at providing brand name, quality merchandise at rock bottom prices. During the good times, some people don’t mind paying premium prices at an upscale store, but there are plenty of us value conscious people that keeps WMT humming. Where WMT really shines is during an economic downturn. When losing your job is a real option, $120 sneakers just don’t quite seem as important as they once were.
A Pseudo Monopoly
If you are the only company in the world that is allowed to sell a product that people’s lives depend on, you will likely have a robust profit margin. This is the world that pharmaceutical companies operate in. Granted companies like Abbott Laboratories (ABT) [Analysis] and Eli Lilly and Co. (LLY) [Analysis] have to keep coming up with new products as old patents expire, and have to deal with government regulation, but the good ones not only survive, they thrive.
Sell What People Want and Need
Sounds simple, but so few companies have mastered it. Consumer staples seem to be the best at it. When you consider the longevity of Johnson & Johnson‘s (JNJ) [Analysis] products such as Band-Aid, Johnson Baby Products, Listerine, Rolaids, Tylenol, Motrin, Benadryl and many others, it is easy to conclude that the company has identified what people want/need and are providing it at a reasonable cost. Although some of Procter & Gamble Co.’s (PG) premium products are struggling, management has taken action to focus on the company’s bargain-priced alternatives and those are seeing some success.
They Got a Name for the Winners in the World
Just as in life, companies that are winners separate themselves from the others. They won’t settle for second best, instead they continue to look for advantages that will them keep a few steps ahead of the competition. Warren Buffet would describe many of the above advantages as wide moats. If you want to buy and hold a stock forever, make sure it has a competitive advantage that is not easily duplicated.
Full Disclosure: Long ABT, JNJ, KO, LLY, MCD, PEP, PG, WMT. See a list of all my income holdings here.