Buy-and-Hold’s New-Age Fab Five

by Marc Bastow | May 8, 2012 7:00 am

Buy-and-hold investments are about as old and stodgy as the strategy itself.

It makes sense. Buy-and-hold investing comes down to believing a company’s business model is both adaptable and long-lived enough to produce products and services that both thrive and survive — and more importantly, said company should throw off sustainable and increasing dividends year after year.

Which is why in polite conversation, the term “buy-and-hold” tends to invoke the same names: Clorox (NYSE:CLX[1]). Johnson & Johnson (NYSE:JNJ[2]). Proctor & Gamble (NYSE:PG[3]). Buffett poster child Coca-Cola (NYSE:KO[4]). The list goes on, but you get the picture.

But it’s time that picture changed.

The buy-and-hold model fits just as well for a new roster of players that I call the “New Age Fab Five.” These companies all possess the characteristics necessary for inclusion in the model that ain’t broke:

Perhaps most importantly for our younger group, they all pay a dividend and easily have the cash and operating cash flow to increase it not only in the short run, but for a very, very long time to come.

And isn’t that what this is all about? Time is on our side — in fact, it’s part of the plan.

So, who are these guys? Well, the Fab Five includes familiar faces that have been around awhile — just not since the dawn of the Dow in 1928, like dividend old-fart 3M (NYSE:MMM[5]). Here’s a look at these five new-age buy-and-hold stocks:

Apple

Say whatever you want about the Colossus of Cupertino, but admit it: Apple (NASDAQ:AAPL[6]) innovates like nobody else in the world. Apple famously started in 1976, so I don’t want to hear that it’s a brand new company. What Apple is, is an adaptable, mature company with an astounding 47% return on equity.

And Apple sprinted out of the dividend blocks[7] earlier this year, declaring a $2.65 quarterly payout — with the first distribution set for July 1 — good for a 1.9% yield on today’s prices. That’s a payout of $10.60 per share — an astounding absolute-value number when you consider Apple is starting from scratch.

Meanwhile, Apple has free cash flow of $30 billion per year on top of nearly $100 billion in cash on hand. So yeah, that dividend flow should continue.

Cisco

Cisco (NASDAQ:CSCO[8]) virtually invented the networking, switch and router world in 1984 when the company was founded. Cisco went public in 1990, registered $1 billion in sales by 1994 and hit a $100 billion market cap in 1998. Cisco is networking products, systems and services.

Cisco just started paying a dividend in the third quarter of 2011 at a fairly conservative — OK, maybe meager — 6 cents per share, or a 1.06% yield. But it’s a start.

Cisco’s ROE is on the low end of our list at 15%, but with free cash flow of $9.4 billion and cash on hand of $46 billion, the dividend has a long way to go — and with Cisco’s strong business, it has a lot of time to get there.

Intel

Yet another icon of the market — in this case, semiconductors — that practically invented the industry. Intel (NASDAQ:INTC[9]) designs and manufactures integrated digital technology platforms.

Founded in 1968 by legends Gordon Moore and Bob Noyce, it took Intel one year to come out with their first semiconductor product. Intel went public in 1972, and by 1990, Intel became a household brand. The company’s innovations have continued to this very day.

Intel started paying dividends in 1992, with a current quarterly payout of 21 cents per … oops! INTC just upped its payout again Monday, so make that 22.5 cents per share for the third quarter, which comes out to a 3.2% yield. Can the dividend increase? It seems like a silly question given that Intel’s latest boost is its third in a year-and-a-half. But the answer is yes — if a 27% ROE and a $13 billion war chest is any indication.

It’s also worth noting that InvestorPlace Editor Jeff Reeves recently gave Intel the nod as the one pick[10] he would make for his children’s future.

Microsoft

No, Microsoft (NASDAQ:MSFT[11]) did not invent the software industry; it just standardized it … then ran with it to the point where it was sued based on its product’s monopoly on the software industry … then survived to fight not just another day, but perhaps a lifetime.

Founded in 1975 by Bill Gates and Paul Allen, Microsoft’s Windows operating system is as famous — or infamous — as any product marketed around the world. In fact, Windows still makes a large part of the world go around.

The good news is Microsoft continues to innovate the platform to adjust to a changing world. Some would say that’s all it can do, and won’t find success anywhere else. A 38% ROE should give Microsoft the time to find out.

In the meantime, enjoy a dividend that has grown from 24 cents per share in 2003 to today’s current 80-cent payout that has MSFT yielding 2.5%. You also can find comfort in Microsoft’s $21 billion in free cash flow and $58 billion stashed away that should sustain payout increases for years to come — regardless of whether you decide to buy an Xbox 2030.

Oracle

Is there more of a contrast in style and substance than Oracle (NASDAQ:ORCL[12]) founder and CEO Larry Ellison and Warren Buffett? Probably not. But they share at least two common denominators: success and business acumen.

Ellison founded the company in 1977 with a focus on relational database information solutions, and in 1978 the Oracle Relational Database Manager Program was developed. Oracle went public in 1986, and the company ranks as the world’s largest database management software company that also cranks out a 24% ROE.

Oracle is a relative newcomer to a dividend, having fired one up in 2009, and it now stands at 24 cents per share for a dividend yield of 0.8%. But hey, you have to start somewhere.

Controversy might follow Ellison, but he sails the seas knowing $11 billion in free cash flow and $30 billion in the bank should be enough to keep dividend investors sated long after he retires to the sea for good.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long AAPL, INTC, JNJ and MSFT.

Endnotes:
  1. CLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CLX
  2. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  3. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  4. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  5. MMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMM
  6. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  7. sprinted out of the dividend blocks: http://investorplace.com/2012/03/does-apple-dividend-signal-end-of-growth-aapl/
  8. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  9. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  10. the one pick: http://investorplace.com/2012/04/intel-intc-a-stock-even-newborns-can-love/
  11. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  12. ORCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORCL

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