Why Dividends?

It's that time of year, kids. The crisp breeze of fall fills the air. Football is back. And the new season of TV-hit wannabes calls a siren song to the couch potato in you. It's a good time of year. Unless, of course, you're back in school after a long, sleepy summer. (I know, I remember those days.)

But school doesn't have to be dull. Heck, learning is good for you. It's also good for your portfolio. That's why we Fools are always in a learning mood. (Seriously, it's in our motto: to educate, amuse, and enrich.) So pay attention -- class is in session. Today, we're going to talk about what might be the best way to guarantee positive returns for your portfolio. It's time to meet your new friend, the dividend.

What is a dividend, anyway?
I'll pass the buck on this to fellow Fool Selena Maranjian, who answered this nicely in The Motley Fool Money Guide. This definition comes directly from that text:

A dividend is a portion of a company's earnings that the firm pays out to its shareholders. If Tattoo Advertising (Ticker: YOWCH) is earning roughly $4 in profit per share each year, it may decide to issue $1 annually to shareholders and use the rest of the money to help build the business. If so, it will probably pay out $0.25 per share every three months. ... This may seem like a pittance, but it adds up. If you own 200 shares of a company that's paying $2.50 per share in annual dividends, you'll receive $500 per year from the company.

Got that? A dividend, quite simply, is part of your share of the profits of a company you own, usually paid quarterly and in cash. Not that you'll see a check. Typically, your broker will receive the proceeds and deposit them straight to your brokerage account. Sounds good, right? Yep. But there's even more to like. Read on.

A few A+ stocks
Many stocks have established a tradition of raising their dividends annually. Motley Fool Inside Value pick Coca-Cola has been among them. Indeed, as Selena pointed out in the Money Guide, had you bought one share of Coke in its first year, by 2001 you'd have had more than 97,000 shares and would be earning more than -- wait for it -- $58,000 in dividends annually. The company has also raised its payout for 42 consecutive years.

Which are the best dividend payers, you ask? This is actually pretty easy to find out. Financial media company Mergent tracks what it calls a list of "dividend achievers" each year. These companies boast a record of growing their payouts substantially over 10 years or more.

Mergent publishes its guide quarterly. You can find the latest here. Better yet, go to your local library and photocopy the key lists as I did. Here are the top five in terms of dividend growth over the past 10 years, as ranked by Mergent:

Company

Annual dividend growth rate

Dividend per share

Current stock price

City National (NYSE: CYN  )

38.3%

$1.44

$67.87

MAF Bancorp (Nasdaq: MAFB  )

38.0%

$0.92

$39.82

Sky Financial (Nasdaq: SKYF  )

36.4%

$0.88

$27.77

Paychex (Nasdaq: PAYX  )

35.4%

$0.52

$37.72

Expeditors International (Nasdaq: EXPD  )

33.2%

$0.22

$54.53

Sources: Mergent's Dividend Achievers, Yahoo! Finance.

Put your cash to work
Naturally, many of these are old firms in very staid, slow-growth industries. And you'd think that would be a disadvantage, right? Sure, but you'd be wrong. Consider that Expeditors International, which provides logistics services to move goods around the globe, has been a 16-bagger over the past 10 years. That easily tops the near 11-bagger you'd have from Starbucks (Nasdaq: SBUX  ) . And most others, too. In fact, you'd have to look to the king of tech multibaggers -- Dell (Nasdaq: DELL  ) , which has notched a 26-bagger in the past decade -- to do much better than Expeditors has. But you'd have taken on extraordinary risk in the process.

Expeditors' remarkable gain was fueled by reinvested dividends. Sure, the company has had its ups and downs, especially over the past year. But the enterprising investor who's held on through thick and thin would have steadily bought more shares on Expeditors' dime -- and often on the cheap. That, in turn, would have increased his payout, which would have created more buying power. Get it?

Reinvesting dividends is a lot like compound interest. The longer it sits, the more it earns. Best of all, reinvesting dividends to buy new shares is a free service at many discount brokerages. (Find out more at our Discount Broker Center.)

Now, do you really want to bet your portfolio on the next eMeringue? I didn't think so. Class dismissed.

This article was originally published on Sept. 12, 2005. It has been updated.

Go on, take the money and run. Take a risk-free 30-day trial to Motley Fool Income Investor today and you'll get access to all of the picks and research that have helped chief analyst Mathew Emmert beat the market by nearly three percentage points as of this writing. And there's never, ever an obligation to buy. (Though if you do, the service is backed by our money-back guarantee, no questions asked.)

Fool contributorTim Beyersloves it when tech stocks pay him dividends. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which ishere. Dell is a Motley Fool Stock Advisor recommendation. The Motley Fool has an ironcladdisclosure policy.


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