Dividends will help your investment grow over time. Image source: Getty Images.
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For many novice investors, the task of choosing from the thousands of businesses the stock market has to offer can feel overwhelming. But finding the best companies doesn't have to be difficult.
In fact, for any investor, arguably the best way to predictably build wealth over the long term is buying and holding shares of solid dividend-paying businesses. To help get you started, we asked three Motley Fool contributors to each choose a dividend stock they believe novice investors would be wise to own. They chose The Walt Disney Company (NYSE: DIS), Procter & Gamble (NYSE: PG), and General Motors (NYSE: GM). Read on to find out why.
The House of Mouse (and so much more)
Steve Symington: The Walt Disney Company might specialize in catering to your inner child, but given its history of healthy dividend payments and group of easy-to-understand, complementary businesses, I think it's an ideal stock for both novice and experienced investors.
As it stands, Disney's largest and most profitable segment is media networks, comprised not only of its namesake channels, but also: Freeform (formerly ABC Family); an 80% stake in ESPN; and 50% stakes in A&E Networks channels like A&E, FYI (formerly The Biography Channel), History (formerly The History Channel) , LMN (formerly Lifetime Movie Network), and other Lifetime channels.
To be fair, the media networks segment is also a source of strife for Disney investors, who too often fret about its stagnant growth -- segment revenue has risen a paltry 3% through the first three quarters of this fiscal year, while earnings have climbed only 2% -- as cord-cutting consumers leave behind their cable subscriptions.
However, I think Disney will prove more than capable of adapting its media networks segment to our changing world as streaming becomes more prominent, including more direct deals to bring its massive library of content to platforms like Netflix.
In the meantime, Disney's other segments are more than pulling their weight; revenue and operating income at the studio entertainment business (including Disney's namesake studios as well as Pixar, Marvel, and Lucasfilm) have risen 37% and 61%, respectively, through the first nine months of the year. The parks and resorts segment has seen revenue climb 7%, with growth in operating income reaching 13%. And despite today's increasingly difficult retail environment, the "consumer products and interactive media" segment (think gaming, like Disney Infinity) has achieved reasonably solid 3% growth in revenue and 7% growth in operating income over the same period. With Disney, diversification is key.
Finally, keep in mind that Disney regularly aims to return at least 20% of all cash generated by the company to shareholders, in the form of dividends and share repurchases, ensuring that investors can share the wealth and enjoy the power of compounding returns along the way.
A maker of products you have in your home
Dan Caplinger: Many dividend stocks have business models that are tough to understand, making it difficult to see exactly how the company generates the income that it passes on to shareholders through quarterly dividend payments. For consumer products giant Procter & Gamble, however, it's pretty easy to track what the company does and why it's successful, because you probably have the company's products in your own home.
Procter & Gamble has done an exceptional job of creating customer loyalty by developing premium brand names on which to focus its marketing and quality-control efforts. With dozens of billion-dollar brands, P&G is known the world over for its products, selling them in more than 180 countries. With an extensive distribution network that seeks maximum efficiency in getting goods to market, Procter & Gamble makes the most of customer demand; it aims to grow that demand by developing innovative items even before many consumers have demonstrated a need for them.
P&G has rewarded longtime shareholders with 60 straight years of dividend increases. It currently yields more than 3%, topping the market's average dividend yield by a wide margin. With such a strong history and plenty of growth prospects looking forward, Procter & Gamble is a dividend stock even a novice investor can understand.
An unloved dividend play
Daniel Miller: To me, one of the most important guidelines for novice investors is to invest in what you're familiar with, and/or an industry you can become more familiar with on a daily basis. That eliminates a number of publicly traded companies, but General Motors fits the bill.
Even if you don't own a GM vehicle, it's easy to see advertisements and marketing on a daily basis. It's easy to find reviews online of new vehicle design, quality, and reliability. You can even test-drive cars if you want to do some grassroots research. It's easy to get familiar with a major automaker's products and market perception, which is important for novice investors.
Another advantage: General Motors is in an interesting spot right now because the U.S. auto market, where GM generates a majority of its profits, is plateauing. Because of that near-term pessimism, the market has sold off GM to such a degree that much of the negativity seems priced in, and its stock is amazingly cheap.
According to Morningstar earnings estimates, GM is trading at a forward price-to-earnings ratio of less than 6. That's dirt cheap compared to the S&P 500's P/E of roughly 24. But it isn't far-fetched for GM to keep cranking out near-record annual profits even if the auto market plateaus for a few years. Only a sharp decline would hurt investors, and that seems less likely as things stand now.
That brings me to my last point: Because GM is trading so cheap, its dividend yield has soared to 4.6%. In my opinion, novice investors should lean toward dividend stocks, because typically those are well-established and less-volatile companies, and the risk is lessened by receiving a near-guaranteed annual percentage return from dividends.
Because novice investors can get familiar with GM very easily, much of the doom and gloom seems priced in currently, and GM offers a large dividend, it seems like a perfect company for novice investors to start a small position in.
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The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends General Motors and Procter and Gamble.
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