The 97% Hiding in Plain Sight

I pick dividend stocks for a living, but even I was surprised to learn that according to Wharton professor Jeremy Siegel, from 1871 to 2003, only 3% of the market's return came from capital gains of the original investment. That means 97% came from reinvesting dividends! Dividend reinvestment is a beast you want to harness.

To help you in the here-and-now, I've got six starting-point stocks coming up, but stay with me on the power of reinvesting for a moment.

The (re-invested) dividend difference
Since the idea of beginning your investing career back in 1871 is pretty ridiculous, consider that a mere $1,000 plunked into what was Philip Morris and is now Altria (NYSE: MO  ) in 1980 would be worth an astonishing $46,000 25 years later -- without considering dividends.

And considering dividends? Had you just taken the dividends without reinvesting them, you'd have $64,000. But had you reinvested those dividends, your results would be mind-blowing: $146,000!

$1,000 to $146,000. In a stodgy, blue-chip, bellwether stock. If you wanted to do that the hard way -- through a non-dividend paying "growth" stock, you'd have to do better than 22% yearly! Any takers?

If you were to tire of amassing whopping dividend-reinvested returns (who would?), you can always switch to an income-only strategy. With Altria specifically, right now you could be taking in a nice $6,300 each year from your original $1,000 investment.

Six starting-point stocks
Where are today's blockbuster dividend payers? That's a million-dollar question, but it's one that could mean the difference between a plush or a parsimonious retirement. A starting point could be some dividend payers from the S&P 500 -- at least one study showed high dividend payers beat low payers by 3 percentage points annually. Doesn't sound huge, but it's darn big from a statistical standpoint. To put that kind of power in your portfolio, here are some ideas -- not recommendations per se, just ideas -- for consideration:

1. First Horizon (NYSE: FHN  ) has had its share of yield curve and housing market woes. But this lesser-known Tennessee bank sports steady dividend growth and a sound operational structure that should buoy the company when the economic tide comes back in. A 4.4% payout keeps investors company while they wait.

2. Ameren (NYSE: AEE  ) is a gas and electricity distributor serving Missouri and Illinois. Though the firm has a solid reputation, it's taking flak over recent power outages and potential volatility surrounding the portion of its earnings coming from unregulated markets. Still, its 4.7% yield is nothing to sneeze at.

3.DTE Energy (NYSE: DTE  ) also delivers a 5.1% dividend the old-fashioned way: Through regulated returns. Though the past three months have been very kind to the stock, the company operates in a state known for its regulatory unfriendliness: Michigan.

4.Reynolds American (NYSE: RAI  ) has been on a tear the past few years, and still manages a 4.6% dividend. But a cigarette maker is pretty far from a feel-good (or smell-good) investment. You decide.

5.Pinnacle West Capital (NYSE: PNW  ) , owner of Arizona's major utility, along with some other odds and ends, has risen 28% since mid-2006. Not bad for a company scoring 75% of its revenues from regulated electricity. The 4.1% yield is nice, although some folks wonder if the utility bull market is becoming a bit long in the tooth.

6.Verizon (NYSE: VZ  ) is catching many a yield-chaser's eye these days with its 4.4% payout. The company's solid financials and renewed focus on its core business could make a recipe for long-term returns. Plus, Verizon just appointed a new COO.

Like to go beyond a starting point on your path to the power of reinvested dividends? If you'd like more detail -- or many more ideas -- I welcome you to try my Motley Fool Income Investor service on me, for 30 days. Click right here to activate your guest pass. Thus far, the service has beaten the market by 9 percentage points.

James Early owns no shares of the companies mentioned in this article. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 04, 2009, at 10:53 AM, noteguy wrote:

    FHN - How can you say the FHN ""sports steady dividend growth"" when the dividend has gone from over $1.70 cash per share to the present payout of only some diluted shares?

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