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Stock Strategist

Seven Free Cash Flow Kings

These companies have wide moats and rising free cash-flow yields.

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Stocks and bonds are different financial assets, of course--different in their levels of legal priority in the event of bankruptcy, and thus, different in their levels of risk. When a company goes bankrupt, its common stock is usually canceled and declared worthless, while bondholders usually get some portion of their original investment back. Even Enron bondholders were offered 14 to 18 cents on the dollar in that company's reorganization filing. That may not seem like much, but it's 14 to 18 cents more than the stockholders received.

Stocks and bonds are similar in one very large respect, however: Investors are paying for the right to receive the future cash flows thrown off by the investment. In the case of bonds, that cash comes in the form of interest. With stocks, the cash may come in the form of dividends (a bird in the hand) or retained free cash flow (two in the bush). (A caveat: If a company can't reinvest its cash at a decent rate of return, retained cash is worth less than if it were paid out as a dividend. This article explains why.)

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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