With Chipotle, Boston Omaha, and Idexx Laboratories already selected as surefire growth stocks for my daughter’s portfolio in 2023, I want to look at the four dividend stocks that will round out her core holdings.
Dividend growers Coca-Cola (KO), Casey’s General Stores (CASY), Pool (POOL), and Union Pacific (UNP -0.68%) offer straightforward businesses and impressive historical returns that make them great picks for a new investor’s portfolio.
By focusing on seven easily understandable companies that my daughter can see in her everyday life, I hope to highlight the vast number of investable businesses around us.
Let’s dig in and see what makes these steady dividend-growth stocks stand out.
1. The Coca-Cola Company
While my daughter probably gets frustrated with how often I say no to getting a Coke, it is undoubtedly her drink of choice for road trip pit stops at Casey’s or dinners at Chipotle. Though Coca-Cola will never become a 100-bagger for her, its consistent dividend growth, incremental sales growth, and uncomplicated operations make for a terrific core holding.
Despite its incredibly stable nature, Coca-Cola rallied to outperform the S&P 500 over the last five years on a total return basis, which includes dividends.
Operating in a $160 billion addressable market expected to grow by 4% to 5% annually, Coca-Cola seems destined to increase sales by mid-single digits in perpetuity. Although these slim gains may not feel thrilling, the company’s mere 6% volume market share of commercial beverages in developing and emerging markets leaves a robust long-term growth runway.
Considering that these markets account for 80% of the world’s population, Coca-Cola’s growth story undoubtedly has a few chapters remaining. Highlighting this growth potential, the company saw India grow its sales volume by 80% year over year in the third quarter of 2022.
Trading right at its 10-year average price-to-free cash flow multiple of 27, Coca-Cola is reasonably priced and looks like a perfect stock for my daughter to learn from over time — reinvesting her dividend yield (currently 2.8%) as she goes.
2. Casey’s General Stores
Aside from its Cokes, Casey’s pepperoni pizza is my daughter’s go-to selection when I ask what we should do for dinner on cooking-free nights. (Well, at least when Chipotle doesn’t get her vote.)
Regardless, Casey’s simple operations and presence seemingly every few blocks around here in the Midwest make it a great selection to learn about and watch over time. Home to 2,400 pizza shops that sell gas across 16 states, Casey’s has grown to become the fifth-largest pizza chain in the United States.
With roughly half its stores in towns of 5,000 people or less, the company often acts as a focal point in most of these small communities. Thanks to these strong ties to its customers, Casey’s has built a rewards program that is now 5.8 million members strong — creating valuable engagement in an otherwise commoditized industry.
Powered by its new stores and various acquisitions (projected to be 345 new locations in 2023), Casey’s has outpaced the S&P 500 Index over the last five and 10 years.
Trading at just 10 times operating cash flow, Casey’s stock looks reasonably priced. Moreover, the business has a track record of growth and a steadily growing dividend (currently yielding 0.7%) even as the company marches toward the coasts.
3. Pool
Pool is an easy pick for a girl who loves swimming — tying nicely into my daughter’s interests and bringing a high and rising return on invested capital (ROIC) of 39%.
Stocks with strong and improving ROICs tend to generate outsized profitability from debt and equity — historically outperforming their lower-ranked peers. While this concept may be beyond a seven-year-old, it stacks the odds in her favor as she holds this stock for the next decade.
Pool ranks in the top 10% of the S&P 500 Index when sorted by highest ROIC. What’s more, its earnings per share have grown 10-fold in the last decade as the company has grown to become the market share leader in pool supplies.
Generating 60% of its sales from recurring, non-discretionary sources like maintenance and repairs, Pool has not only thrived over the last decade but has positioned itself to succeed regardless of the housing market.
Down over 30% in the last year, Pool’s shares now trade at just 18 times earnings — well below its 10-year average multiple of 30. Pool’s combination of discounted price, understandable operations, and quickly growing 1.2% dividend make it a perfect holding for my daughter.
4. Union Pacific
Headquartered near my daughter’s hometown and with operations throughout the western two-thirds of the United States, Union Pacific is an outstanding stock to highlight that investable businesses are all around her.
Furthermore, through its balanced combination of three operating segments — bulk, industrial, and premium — Union Pacific is beautifully diversified, making it a perfect buy-and-forget-about core holding.
With 6,000 locomotives and 30,000 cars (and many more leased), the company connects with Canada and all six Mexican gateways, providing it with a unique geographic moat.
Best yet, Union Pacific has gradually realized improving operating efficiencies, growing its free cash flow-to-sales ratio from 12% in 2012 to 24% in the last year. Riding these efficiencies, the company has eked past the S&P 500 over the past five and 10 years.
Buoyed by its strong cash generation, Union Pacific lowered its share count by 35% in the last decade. On top of that, its dividend has ballooned 285% over the same time — providing an incredible cash return to shareholders.
With its price-to-earnings ratio down to 19 (from nearly 30 in 2021), a 2.4% dividend, and the company’s crucial importance to the U.S. economy, Union Pacific stock makes a superb core holding for my daughter.
— Josh Kohn-Lindquist
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Source: The Motley Fool