Login | December 07, 2023

The best stock

Ask the Fool

Published: November 7, 2023

Q. What's the overall best stock? -- R.Y., Burley, Idaho
A. There's no single perfect stock, as different kinds of stocks can be particularly well-suited to different investors' needs. If you're in or nearing retirement, for example, you might reasonably seek out dividend-paying stocks, while those aiming to beat the market might focus on finding undervalued stocks or attractive growth stocks for their portfolios. Risk-averse investors might favor established companies with dependable and growing revenue and earnings.
Remember that even if you identify what looks like a perfect stock, the unexpected could still happen. Years ago, few would have ever expected to see Polaroid, Eastman Kodak, Toys R Us, Pan Am, General Motors, Chrysler, Woolworth's, Texaco or Sports Authority file for bankruptcy or go out of business. That's why it's important not to put too many of your eggs in one basket.
There is one single investment you might consider, though -- a simple low-fee, broad-market index fund, such as one that tracks the S&P 500. It will immediately diversify your portfolio across many stocks.
Q. How can a company be "growing too fast to be profitable"? -- C.D., Brookfield, Wisconsin
A. It might be that the company is in a rapid growth phase and is therefore spending every dollar of income, and possibly even taking on debt, to fuel its growth. It might, for example, be spending a lot on hiring people, buying advertising or building more factories. This could work out if, over time, it spends less than it brings in and turns profitable. It's not a guaranteed strategy, but it has worked for the likes of Amazon.com and others.
Fool's School
Nab Dividend Yield of 20% -- or More!
If you're not a fan of dividend-paying stocks, you should be: They can turbocharge your portfolio's growth. Obviously they pay you income, typically on a quarterly basis. And they'll also increase their payouts, typically annually. On top of that, these companies' stock prices will also tend to rise over time.
It's often underappreciated how much income dividends can deliver in the long run. You could end up with an effective dividend yield of 20% or more, for example.
Imagine that you buy 100 shares of stock in the Malodorant Deodorant Co. (ticker: EWWWW) at $100 each, for a total of $10,000. Let's say that it pays out $4 per share in annual dividends when you buy your shares.
A dividend yield is the annual dividend amount divided by the current stock price. So dividing $4 by $100 gets you 0.04, or a yield of 4%. (The long-term median dividend yield of stocks in the S&P 500 is roughly 3%, by the way.) Your investment of $10,000 will generate around $400 in dividends in your first year.
Now let's assume that Malodorant Deodorant increases its dividend payout by 6% each year. In 10 years, its $4 dividend will become $7.16. In 10 more years, it will be $12.83. Ten years after that, 30 years after your purchase, the dividend will pay $22.97. The stock itself will probably have increased in value, too. If it grows by 6% annually, it will go from $100 per share to $574 in 30 years. If someone buys a $574 share then and it pays a $22.97 dividend, their dividend yield would be (wait for it) 4%.
But for you -- who bought your shares at $100 apiece -- the effective dividend yield would be a whopping 23%! Divide the $22.97 dividend by your cost basis of $100 per share, and you get 23%. So from your original $10,000 investment, you'd be collecting around $2,297 per year.
Buying and holding great dividend-paying stocks is a powerful move.
My Smartest Investment
Ignored Analysts
I've made a bunch of smart moves -- such as taking Wall Street analyst ratings with a grain of salt. For example, I bought into IBM decades ago, when analysts were against it, for around $42 per share and more than doubled my money. They also didn't like AT&T -- but I bought anyway, at $36 per share, only to see analysts recommending the stock when it was around $60.
I like tried-and-true companies that have been around for the last 50 or more years and that pay me a dividend, no matter how small, that increases from year to year. My early investments were mostly in blue-chip companies such as Abbott Laboratories, Anheuser-Busch, Bristol Myers Squibb, Coca-Cola, General Electric, McDonald's, Medtronic and Procter & Gamble. -- C.J.M., Boynton Beach, Florida
The Fool responds: First off, understand that there are "buy-side" analysts who work for big investment companies, recommending stocks to buy or sell; those internal reports generally stay within their companies. There are also "sell-side" analysts, who work for broker-dealers and investment banks, and whose ratings and reports are what you'll most likely run across.
It's definitely smart not to pay too much attention to sell-side analyst opinions. For one thing, those predictions are often wrong, though track records vary. Analysts can have conflicts of interest, too: They may be reluctant to issue poor ratings to companies because those companies may then not become customers of their employers.
Foolish Trivia
Name That Company
I was formed this year -- on April 14 -- when two major railroads joined to become the first single-line transnational railway linking Canada, the United States and Mexico. Those two railroads were founded in 1881 and 1887, and each merged with or acquired other rail lines over the years. They were involved in hotels, irrigation systems and other operations, and supported war efforts in both World War I and World War II. Today, I'm headquartered in Calgary, Alberta; I boast about 20,000 route miles and employ around 20,000 railroaders. My market value recently topped $73 billion. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1965, when a Connecticut teenager aiming to pay for college opened a sandwich shop with $1,000 from a family friend who became a partner. By 1974, I had 16 locations. Today, I sell salads, bowls, sandwiches and wraps in more than 37,000 locations in over 100 countries. My franchise network features more than 20,000 entrepreneurs. Private equity firm Roark Capital is trying to buy me for as much as $9.55 billion. (Brands it already backs include Arby's, Auntie Anne's, Baskin-Robbins, Buffalo Wild Wings, Carvel, Cinnabon, Dunkin', Jamba and Jimmy John's.) Who am I? (Answer: Subway)
The Motley Fool Take
Bill Gates Buys Beer
Bill Gates said in 2018 that he wasn't "a big beer drinker." But the Bill & Melinda Gates Foundation Trust recently revealed a large investment in beleaguered Bud Light maker Anheuser-Busch InBev (NYSE: BUD). Here's why that big bet could pay off.
Anheuser-Busch InBev has been punished by a boycott of Bud Light by some who see the company as supporting transgender people. For over 20 years, Bud Light reigned as the top beer (by sales) in the United States. By June, the boycott caused it to slide into second place (behind another Anheuser-Busch InBev product, Modelo Especial). CEO Michel Doukeris acknowledged the lower numbers were due to the Bud Light boycott.
But the negative impact of the boycott could be waning. A recent Deutsche Bank survey found that the percentage of respondents who say they're very unlikely to buy Bud Light plunged from 18% in July to 3% in August. Meanwhile, Doukeris says that consumers "want to enjoy their beer without a debate" and want Bud Light "to focus on beer" -- and he's heard them.
Overall, the company's business remains solid. Even with the Bud Light boycott weighing on growth, Anheuser-Busch InBev's revenue rose 7.2% year over year in the second quarter. Its North American market share has also been stable since late April. Any uptick in customers returning to Bud Light should provide a boost to Anheuser-Busch InBev.