Stocks for Dummies

There are at least two possible ways of trying to outperform the market.

One way would be to buy fast-growing small companies such as Hansen Natural (Nasdaq: HANS  ) , which has delivered 25,500% returns over the past decade.

The other way would be to invest in tried-and-true brands like Coca-Cola, which has delivered an annual return of 14.3% since 1950.

Are you feeling lucky?
The first way will require some skill and a bit of luck. Let's face it: We all want to find the next Microsoft or even the next Whole Foods, but some of us don't have the persistence or that special stock-picking magic that results in finding 25-baggers.

There's another way, though. Many ordinary investors can outperform the market by doing the following:

1. Invest in well-known companies that generate a lot of cash and pay dividends.
2. Reinvest those dividends.
3. Repeat.

The road less traveled
Investing in dividend stocks is a very compelling strategy. Studies have shown that 4.7 percentage points of the U.S. 20th-century stock return of 10.1% resulted from dividend reinvestment. As Jeremy Siegel has pointed out, dividends are the primary source of investor return for the long-term investor.

So the key is finding great companies that pay dividends. The rest should take care of itself.

Stocks like these
The dividend strategy has been shown to outperform over long stretches of time -- say, for the next 50 years. Some of us (myself included) have shorter time horizons than that, so I ran a screen for some dividend payers that might be of interest over a 10-year time horizon. Here are some stock ideas for further research.

Company	Yield	5-Year Annualized Growth Estimate
Edison International (NYSE: EIX  )	2.7%	6.5%
Emerson Electric (NYSE: EMR  )	2.4%	10.0%
3M (NYSE: MMM  )	2.4%	11.0%
Wachovia (NYSE: WB  )	4.0%	9.0%
Wyeth (NYSE: WYE  )	2.0%	8.0%
United Parcel Service (NYSE: UPS  )	2.1%	12.3%

Data from Yahoo! Finance as of Jan. 11, 2007.

Each one of these companies delivers reasonable growth; generates a lot of cash; and, of course, pays out a healthy dividend.

These are the types of companies that James Early and his team at Motley Fool Income Investor look at each month. In fact, UPS is already an Income Investor selection. They want dividend payers that have the cash to sustain their payout, while also offering a bit of growth.

That's one market-beating strategy that all investors can understand. If you'd like to see all of the latest stock picks and investment research from the Income Investor team, click here.

John Reeves does not own shares in any of the companies mentioned in this article. He's not sure if he's found the next Microsoft or not, which probably means he hasn't. Coca-Cola, Microsoft, and 3M are Inside Value recommendations. Whole Foods is a Stock Advisor pick. The Motley Fool has a disclosure policy.