Guarantee Your Returns

Guaranteed.

What a funny word, especially when it comes to investing. Seriously, do you know of anything that's really guaranteed? Think about it. How many times have you had your "satisfaction guaranteed" only to end up hating what you bought? When was the last time you took advantage of a vendor's "low-price guarantee?" Never, right?

Death, taxes, stocks
The truth is, there are few real guarantees. Most aren't all that pleasant, either. For example, you'll die someday. The feds will claim a share of your income in taxes. And, oh, don't forget the state. It'll get its slice, too. (Unless, that is, you're the kind who likes the look of iron bars and concrete.) No wonder most of us are skeptical when we're promised anything.

So I'm hesitant to play the part of professor positive by offering you yet another guarantee. But I can't help myself. I say you can guarantee a return from your stocks, if you pick the right ones. Which are those, you ask? The ones that pay a generous dividend, of course.

Not all stocks are created equal
That's not to say you will always generate a positive total return from stocks that offer a payout. You won't. Indeed, my screener at Fidelity shows 16 large-cap stocks that lost money over the past five years in spite of a dividend yield in excess of 3%. Take General Motors (NYSE: GM  ) , for example. Its total return over the past five years, with dividends reinvested, is a breathtaking -43%. Yet because the stock's price has declined significantly, the stock yields an 8.5% as of this writing.

It could've been worse. No, really, it could have. GM's stock closed at $55.63 on Nov. 10, 2000. This past Friday's close was $24.48, with no splits in between. The total return before dividends, then, was -56%. Ouch.

By all accounts GM has been a miserable stock and an even worse business. But the damage would have been far more substantial without the cold, hard guarantee of cash money. Is it any surprise, then, that dividends accounted for more than 41% of the total return for large-cap stocks from 1926 to 2003, according to Ibbotson Associates?

Hardly. In fact, chief analyst Mathew Emmert has seen this truth play out with his own picks for Motley Fool Income Investor. Take Telecom New Zealand (NYSE: NZT  ) , for one. When Mathew recommended the stock in the August 2004 issue, he valued the shares at $34 per stub and added them to the portfolio at $30.42. And since? The stock closed at $31.86 on Friday, for a gain of 4.7%. That's decent, but well below the 14.1% returned by the S&P 500 over the same period.

Wait! There's more!
Fortunately, there's more to this story. For one, the dividend has grown dramatically in recent years. In fact, when Mathew picked it, Telecom New Zealand had boosted its payout ratio from 50% to 70% and its quarterly per-share dividend by 50%. It has grown even more since, resulting in a yield that has risen from 5.2% back then to 10.2% as of this writing.

The impact of that cash cushion has been dramatic. In fact, it transforms the stock from a laggard to a leader. With the dividend, Telecom New Zealand's total return jumps to 15.3%, beating the general market by more than 1%. Quite a turnabout, eh?

Three more that pay
It's not like such stories are uncommon. In fact, there's an entire investing strategy dedicated to buying and holding stock in companies that generate substantial cash flows and consistently hike dividends. It's called dividend growth, and we have a discussion board here at Fool.com dedicated to it. The idea is to find firms that boast considerable cash flows, growing earnings, and a record of raising their payouts.

Recently, we looked for a few stocks outside of the Income Investor portfolio that met those criteria. Out of more than 100 from our original screen -- which sought annual dividend growth of 10% or better over the past five years -- three stood out:

Company

Closing Price
on Nov. 11, 2005

Dividend
Yield

Five-Year Dividend
Growth Rate

BHP Billiton Ltd. (NYSE: BHP  )

$31.43

2.10%

16.2%

Craftmade Int'l (Nasdaq: CRFT  )

$18.95

2.50%

32.0%

Southern Peru Copper (NYSE: PCU  )

$58.49

11.30%

90.6%

Data provided by Capital IQ, a division of Standard & Poor's.

BHP is a huge Australian firm with major interests in mining and energy. Similarly, Southern Peru Copper operates copper mines in Latin America, but is a fraction of BHP's size. Craftmade is vastly different from both. Not only is it a small cap with an enterprise value of $116.8 million, but it also sells ceiling fans and outdoor lighting.

That said, all three share common traits such as enormous free cash flow and a price-to-earnings to price-to-growth ratio of less than 1.0, which indicates a potential deep value. When you mix in a growing dividend already above the S&P 500 (AMEX: SPY  ) average of 1.98%, these stocks appear to have the potential to deliver market-thumping returns.

A Foolish bottom line
Learning to invest is easy. Learning to beat the market isn't. That's why, over the course of decades, some of the best money managers in the business -- including value investing pioneer Benjamin Graham -- have relied on dividends for help. They recognized that cash is one of few things they could count on in their quest for better returns. It's no different for you. So take a lesson from them and cash in on the market's one and only guarantee. Your portfolio will thank you.

Go on, take the money and run. Take a risk-free 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 since the service started. And there's never, ever an obligation to buy. (Though if you do, there's a money-back guarantee, no questions asked.)

Fool contributor Tim Beyers thinks there are very few guarantees in investing. Cash is one of them. Tim didn't own shares in any companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking his profile. The Motley Fool has an ironclad disclosure policy.


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