Face it, you want it all. You want to have your cake and eat it too.
You want the reliable income and stability that dividend-paying stocks provide, but you also want to beat the market.
Sound like a pipe dream? It’s not.
According to Ned Davis Research, between 1972 and 2010, dividend-paying stocks returned 8.6% versus just 1.4% for companies that didn’t pay a dividend. That’s an astonishing outperformance that means the difference between turning a $100,000 portfolio into $2.4 million versus just $174,000.
And for those worried about the storm clouds in today’s global economic picture, Ned Davis also showed that during periods of market decline between 1970 and 2000, dividend payers outperformed their stingy counterparts by 1.5% per month.
Here’s why they trounce the market so impressively
For one, since dividends are paid in cash, when you invest in a dividend-paying stock you can be more confident that the company you’re investing in actually makes cold, hard cash. That may sound simplistic, but many companies report accounting profits without actually banking any cash.
In addition, the beauty of many dividend stocks is the long-term dependability of the companies backing them. This allows investors to take advantage of compounding returns over long periods of time. Long-time dividend investors are surely on board with Albert Einstein, who supposedly called compound interest “the most powerful force in the universe.”
Back by popular demand
In a previous Motley Fool report, we offered readers the opportunity to download a dividend-focused special report that delivered a 13-stock dividend portfolio. That report was downloaded by almost half a million investors across the globe!
Due to the overwhelming popularity of that report, we decided to revisit the wonderful world of dividends to bring you a new, ready-to-trounce-the-market dividend-stock portfolio.
In this report you’ll find nine dividend stocks that will not only let you sleep like a baby, but can also help put your portfolio on the path to market-beating returns.
While you certainly don’t have to buy all nine of these to get the most out of the power of dividends, these have been specifically chosen from a range of industries and a range of dividend strategies so that, taken as a group, they create a complete dividend portfolio.
5 All-Around Dividend Rock Stars
Not every band is of Rolling Stones caliber, and not every dividend stock is of Procter & Gamble [NYSE: PG] caliber.
In fact, there is a special group of dividend stocks that Standard & Poor’s keeps track of that it calls the “Dividend Aristocrats.” These dividend payers don’t just pay a dividend. They’re not just any old company that’s had a few dividend increases. No, these dividend maestros have — as S&P puts it — “followed a policy of increasing dividends every year for at least 25 consecutive years.”
You should be. Because when a company has a 25-plus year streak of paying and raising its dividend, you better believe investors are feasting on impressive compounding returns.
Meet the aristocrats
As you might expect, the Dividend Aristocrats are an elite group.
In fact, of the 500 companies in the S&P 500 index, only 54 of them currently qualify for the title. And while most of the companies on that list could make solid investments, there are some that stand out above the rest of the pack.
The five stocks below are some of the greatest businesses in existence.
They each have what we Fools like to call a “moat,” that is, a competitive advantage that allows them to consistently earn above-average returns. Their inclusion on the Dividend Aristocrat list shows their consistent dedication to returning cash to investors. And while it’s tough to find businesses of this quality at bargain-basement prices, all trade at attractive valuations.
||10-Year Average Annual Dividend Growth
|ExxonMobil [NYSE: XOM]
||Global energy champ
|Johnson & Johnson [NYSE: JNJ]
||Diversified health-care products powerhouse
|PepsiCo [NYSE: PEP]
|Snacks and beverages giant
|Procter & Gamble [NYSE: PG]
||Branded consumer goods leader
|Wal-Mart [NYSE: WMT]
||Low-price retail kingpin
Source: S&P Capital IQ.
ExxonMobil sells products — oil and natural gas — that are commodities. For the most part, the crude oil Exxon pulls out of the ground is the same as the oil that, say, Chevron [NYSE: CVX] does.
So what makes Exxon so great? It’s the sheer scale that the company has, but it’s also got a long history of wise capital allocation and investment in technology to keep it at the forefront of the industry. And because the company continues to put its money to work in places where it can earn high returns, there should be more good times ahead for investors.
Many health-care companies that focus on patented drugs face grave problems because they’re starting down the barrel of big patent expirations. Not so at J&J. The company has a highly diversified business that spans consumer brands like Tylenol all the way to products that surgeons rely on in the operating room. J&J has faced challenges in recent years but it’s a highly innovative company, and its decades of success have proven its mettle in staying at the forefront of the health-care industry.
Above, PepsiCo was very purposely listed as a “snacks and beverage giant.” Because the company has Pepsi in its name, it’s easy to forget that it also houses the massive Frito-Lay snacks division. Heck, it may also be easy to forget that the Gatorade empire is PepsiCo’s Gatorade empire. Sure, Coca-Cola [NYSE: KO] is a fantastic company, but it’d be a big mistake to overlook the might and staying power of PepsiCo.
Gillette, Tide, Pampers, Oral-B, Mr. Clean, Crest, CoverGirl, Tampax, Old Spice. If you know these brands, then you know Procter & Gamble. Since 1837, P&G has been creating products that consumers want to use. And use again. And use again. And use… OK, you get the picture. Recently, P&G has faced tough questions from investors as its growth engine appeared to have stalled. However, hopes are high that growth will reignite after the company brought back former CEO A.G. Lafley to lead the company again. The good news for investors is that the core of P&G’s empire is strong enough that it continues to generate monster profits — and pay those handsome dividends — as it revs that growth engine back up.
Finally, when it comes to price, Wal-Mart can’t be beat. When you consider that competitive advantage is all about a company’s ability to bring more value to its customers than competitors, you realize what a big deal this is. Wal-Mart will continue to dominate the retail landscape simply because its customers are consistently able to stretch their dollar further in Wal-Mart’s stores.
Your portfolio, starring…
In creating your dividend portfolio, you could go with the five stocks above and stop there. You might be a bit under-diversified, but you wouldn’t be in bad shape.
Below you’ll find two “dividend divas.” They’re more temperamental than the stars above, but can deliver in a big way.
2 High-Yield Dividends Divas You Can Buy
When you’ve got a company that can consistently grow its dividend by double-digit percentages every year — as most of the five companies you just read about have — a 2% dividend can go a long way.
But there are some companies out there whose stocks have yields that make that 2% payout look like a joke. Some have yields two, three, or even five times what you can currently get from a 10-year Treasury bond.
Before you get too excited about these massive yields, it’s important to understand that a huge dividend is not a free lunch. The dividend yield is right out in the light of day where everyone can see it, so if it were so obvious that the yield was a steal, investors would flock to the stock and the yield would fall.
Instead, the stocks that have the biggest yields are often stocks that investors are looking at askance. Investors may believe there are risks to the businesses behind the stocks that may make it difficult for them to keep up their dividends.
Some, not all
While the crowd may be on target with their pessimistic assumptions in some cases, in others they be sorely mistaken and missing out on some really great dividends.
Now that your dividend portfolio has a solid base of five rock star Dividend Aristocrats, let’s jazz it up with two high-yield divas that could spice up your returns.
AT&T [NYSE: T]
As smartphones become an ever-more-powerful hub for consumers to communicate, shop, and otherwise interact, service providers like AT&T will stay in demand as providers of the wireless highways that the data travel over. And investors in this important service provider can currently pocket a 5.3% annual dividend.
The wireless business has been where it’s at for telecoms in recent years, and AT&T is one of the major powerhouses. As is usually the case though, the status quo makes no promises to stay put. And we’ve seen some evidence of the changing landscape as Verizon [NYSE: VZ] took the plunge and agreed to buy Vodafone‘s [NYSE: VOD] ownership stake in Verizon Wireless for $130 billion. This could put pressure on AT&T to make some moves of its own.
But let’s not forget that wireless isn’t AT&T’s only business. In fact, it was only 46% of the company’s 2012 revenue. Though wireline phone service may be a slowly-dying business, broadband and other data services aren’t, and AT&T is building stronger customer relationships through offerings like AT&T U-verse, which offers bundled digital TV, internet, and voice services.
Currently, that sweet 5.0% dividend comes from AT&T paying out just over 50% of its free cash flow — which is a very sustainable ratio. In other words, take that sustainable payout ratio along with the stable business, and it sure looks like Ma Bell’s dividend is a good buy.
New York Community Bancorp [NYSE: NYCB]
If you want dividend growth, you may want to look elsewhere — New York Community Bancorp hasn’t raised its dividend since 2005. However, with investors nervous about the economy and banks in particular, Mr. Market has knocked NYCB’s stock down to a level where its $1 dividend gives you a serious 6.2% yield.
There are risks for NYCB. For instance, banks have to set aside money based on how much of their loans they believe will end up turning sour. The amount that NYCB has set aside is a fairly small percentage of its currently-nonperforming loans, so if management turns out to be wrong in its estimates, that could put a drag on earnings.
But the bulk of NYCB’s loans are not on over-leveraged single-family homes in Las Vegas that were given to minimum-wage earners. Instead, much of NYCB’s loan book consists of conservative loans on low-rent apartment buildings in New York City whose value is based on the actual cash flows that the buildings generate.
Some investors may see “bank” as a four-letter word, but if you’re looking for big dividends, NYCB may be your ticket.
Your dividend portfolio is now at seven stocks — five dependable dividend “rock stars” and two higher-yield divas. Next up is a look at a couple of lesser-known dividend stocks that have what it takes to become stars someday.
2 Dividend Up-and-Comers You Don’t Want to Miss
To stretch the music metaphor just a little bit further, if the first five stocks were reliable rock stars and the next two were high-yield divas, the next two we’re going to take a look at are the yet-to-be-discovered stars of tomorrow.
Though it can be tough to find solid dividends among the small-cap ranks — many small companies prefer to reinvest all of their cash in growth — it’s a big mistake to skip over this part of the market. And because smaller companies tend to get less exposure than larger ones, many investors miss these companies and allow the more intrepid investors to scoop them up at bargain prices.
Better than Goldman
At this point it may be nearly impossible for some people to think about Goldman Sachs [NYSE: GS] and other investment banks without thinking about their part in the financial crisis. It’d be understandable if some investors get the urge to shake a fist every time they hear Goldman’s name. But let’s not be too quick to lump every investment bank in the same category as the too-big-to-fail screw-ups.
Greenhill & Co. [NYSE: GHL] is an investment bank. It’s a high quality investment bank that lands the same caliber of people (or better) than the folks at Goldman, Morgan Stanley [NYSE: MS], or JPMorgan Chase[NYSE: JPM]. But you probably haven’t heard of Greenhill.
Why? Because Greenhill does not fancy itself a financial master of the universe.
It does not have massive trading operations that threaten the ongoing existence of the company or the health of the U.S. financial system. Instead, Greenhill focuses primarily on advisory services. That is, it provides companies with advice on mergers and acquisitions, raising capital, and other special financial situations.
And while the name Greenhill may not ring bells for you, the projects it’s worked on will no doubt be familiar. The deals that Greenhill is currently working on (or recently wrapped up) include SUPERVALU‘s [NYSE: SVU] multiple deals with Cerberus Capital; Linn Energy‘s [Nasdaq: LINE] $4.4 billion acquisition of Berry Petroleum [NYSE: BRY]; GrainCorp’s consideration of Archer Daniels Midland‘s [NYSE: ADM] unsolicited $3.8 billion takeover offer; Actavis‘ [NYSE: ACT] $8.5 billion acquisition of Warner Chilcott [Nasdaq: WCRX]; and it’s also advising the city of Detroit’s General Retirement System and the Police and Fire Retirement System in connection with the city’s financial struggles.
The beauty of this business is that while Greenhill spends significant money on its people, the business itself doesn’t require much capital. That means that when the company’s business is raking it in, there is plenty of cash available to pay shareholders.
Not a minor player
While hospitals do sanitize and reuse some equipment, the high standard for sterility and cleanliness means that there are a great many items that get used once and pitched. These items include gloves, disposable scalpels, respiratory tubing, umbilical cord clamps, medicine cups, and bandages.
Meanwhile, with the cost of health care rising and everybody trying to cut costs wherever they can, hospitals and other health-care providers want to find the most effective and cost efficient way to stay stocked up and ready to serve their patients.
Enter Owens & Minor [NYSE: OMI]. Owens & Minor is a distributor of medical and surgical equipment, as well as a provider of outsourced logistics and inventory management services. The company works with 1,400 suppliers and has access to over 200,000 medical-surgical products, including products from its own private-label MediChoice line. In a business where getting it right is absolutely critical, it says a lot that the company has a 98% customer satisfaction rating across roughly 4,000 customers.
For investors, the proof of its success is in black and white in the numbers. Going back to 2008, the company had an average return on capital of nearly 12%. Between 2000 and the 12 months ending in June 2013, it grew earnings per share 162%. And the dividend? Owens & Minor has raised its dividend every year since 1997 and has more than doubled its payout since 2006.