Motley Fool: Some PepsiCo for Your Portfolio?

If you’re in the market for stable, established companies with track records of solid dividend growth, consider PepsiCo (Nasdaq: PEP).

In addition to its namesake Pepsi line, the company boasts 22 brands that generate more than $1 billion apiece in annual revenue, including Gatorade, Mountain Dew, Tropicana, Quaker, Lay’s, Doritos and Cheetos. Currently, PepsiCo dishes out $0.805 per share quarterly, with its dividend recently yielding 3.25 percent. The company has increased its dividend annually for 45 consecutive years (through 2017), and further increases are likely.

PepsiCo’s wide moat, featuring intangible assets, cost advantages and brand power, keeps competitors at bay. And it boasts strong relationships with distributors and retailers.

One challenge facing PepsiCo is that consumer tastes in the U.S. are trending toward healthier products. In response, PepsiCo is adding healthier items to its lineup, such as Tropicana Essentials Probiotics, while promoting existing healthier options such as its juices and aiming to reduce the sodium content in its foods. Meanwhile, international demand for much of PepsiCo’s offerings is growing.

PepsiCo is cutting costs by increasing automation, recently implementing robotic truck loaders at shipping centers and automating some packing processes. With a solid dividend and some underappreciated growth catalysts, PepsiCo is worth considering for your long-term portfolio.

Ask the Fool

Q: How should I go about creating and using a stock watch list? – M.S., Warren, Ohio

A: Start by jotting down the names of companies you read or hear about that seem like promising investments. You could do so on paper, but maintaining a list online is easier. You can set up an online watch list or “portfolio” full of stocks of interest at sites such as finance.yahoo.com, morningstar.com, marketwatch.com and others. You might pretend that you bought one or more shares of each at the stock price at which you first noticed the company.

Meanwhile, research and follow the companies on your list and get to know them well. When you’re ready to buy, you’ll be familiar with a bunch of companies and will have a sense of which are strongest, growing most briskly and priced attractively.

Monitoring your list also will help you notice when a company of interest falls in price significantly, presenting a possibly great buying opportunity. When that happens, do further research to make sure any problems it’s facing seem temporary and not protracted.

Q: What’s “window dressing,” financially speaking? – T.D., Watertown, Wisconsin

A: Window dressing is a not-so-great practice employed by some mutual fund managers. Since fund managers have to report regularly on their funds’ holdings and they want to impress existing and potential shareholders, some will sell poor performers and replace them with popular stocks before the reporting period ends. That will make a good impression on someone reviewing their list of holdings as of the end of the quarter.

You might avoid being taken in by window dressing by favoring funds with low turnover ratios, which reflect relatively infrequent trading activity.

My dumbest investment

My dumbest investment was a company out of Bainbridge Island, Washington, many years ago. The marketing was brilliant, with a sign at Safeco Field, Shaquille O’Neal wearing the company hat at an NBA championship celebration and more. It seemed to be a successful high-tech health business, aiming to combine fitness and health services under one roof. I toured the facilities, met staff and was impressed.

I invested $10,000 in the company, but it turned out to be a scam. I can’t recall management’s names, but they should be getting out of prison soon. – S.O., online

The Fool responds: You weren’t alone – that was cited as the largest stock fraud case in Washington state history. It’s easy to get excited about fascinating and promising businesses you run across, but you should aim to dig into them deeply before investing – even more so when they’re small and/or young.

Hearing management’s rosy outlook isn’t enough, and touring the premises isn’t necessary. Look into the history and track record of management. Look into their books to see whether they’re turning their great ideas into profits. Look into current and possible future competitors, and weigh all risks facing the company.

Even if you do all that, a company could still surprise you by imploding. Thus, it’s smart to protect your money by spreading it across a bunch of companies (or a simple and low-fee index fund) and not just a few.