The Best Stock of Both Worlds

A million-dollar question: Where will the market's biggest earnings growth come from? Nobody knows for sure, but at least one study reveals it might be hiding where you least expect it. Moreover, the study yields a simple insight you can put to use in your own investing.

In 2003, Rob Arnott, now editor of the Financial Analysts Journal, a publication of the CFA Institute, and Clifford Asness, managing principal at AQR Capital Management, looked at dividend yields and subsequent 10-year earnings growth.

Their findings? Amazingly, earnings growth increased with dividend payout, right up to the highest payers having the highest next-10-year earnings growth.

Scratching your head? So were many investors. Traditional wisdom was that companies paid dividends when they didn't have growth opportunities, not the other way around. But dividends can signal corporate health and force managers to allocate capital efficiently.

The raw power of dividends
That's why dividend investing is so special. It's why Altria (NYSE: MO  ) has been one of the best investments of the past 50 years. It's why Jeremy Siegel, professor of finance at Wharton, wrote an entire book devoted to the subject. It's why Ned Davis Research shows S&P 500 dividend payers have outperformed non-payers by six percentage points annually from 1972 through 2005.

And it's why I feel dividend stocks are appropriate for nearly every investor. Which stocks? As a starting point, I ran a screen for high-yielding stocks that are also delivering high earnings growth. These aren't recommendations (though I do run a dividend-stock recommendation service), but they could kick-start further research. Here are the results:

Company

Current EPS Growth

Dividend Yield

Bank of America (NYSE: BAC  )

15.8%

4.2%

CNOOC (NYSE: CEO  )

16.1%

3.0%

BellSouth (NYSE: BLS  )

30.2%

2.5%

HSBC (NYSE: HBC  )

14.6%

4.2%

PetroChina (NYSE: PTR  )

25.2%

3.6%

Barclays (NYSE: BCS  )

34.4%

3.5%

Source: Thomson Financial

More than meets the eye
Of course, there's more to investing than simple screens. For example, chase a stock with a low P/E and you'll find one -- but you may be paying dearly in future earnings growth. Or the stock's prospects may be risky enough to warrant that menial valuation.

I'd never invest in a company without a thorough evaluation of its management and competitive prospects. Valuation is also critical -- there are many great companies out there, but a great company at too great a price is a lousy investment. When I'm finding stocks for my own newsletter, I'll often begin with screens before doing more legwork. Still, starting with dividend stocks off the bat gives me an advantage I wouldn't want to pass up, and I urge you to give dividend payers a close look for your own investing.

How else can you put this power to use?
I'd also like to invite you to check out my Motley Fool Income Investor newsletter, which is beating the market by more than eight percentage points. You can pick up a free guest pass and see for yourself. Simply click here to learn more.

James Early owns shares in CNOOC. Bank of America is an Income Investor recommendation. The Motley Fool has a disclosure policy.


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