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 that 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 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 6 percentage points annually from 1972 through 2005.

And it's why I think 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

Three-Year
EPS Growth

Dividend
Yield

Dow Chemical (NYSE:DOW)

26.7%

3.3%

Pfizer (NYSE:PFE)

89.4%

4.6%

DuPont (NYSE:DD)

50.5%

3.0%

ConocoPhillips (NYSE:COP)

42.3%

2.4%

Waste Management (NYSE:WMI)

20.1%

2.8%

Chubb  (NYSE:CB)

39.0%

2.3%

Royal Dutch Shell (NYSE:RDS-B)

30.8%

3.9%

Source: Capital IQ, a division of Standard & Poor's.

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 pay 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 nearly 10 percentage points. You can pick up a free guest pass and see for yourself. Simply click here to learn more.

This article was first published on Jan. 5, 2007. It has been updated.

James Early does not own shares of any company mentioned. Dow is an Income Investor pick. Pfizer is an Inside Value choice. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (56)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 525028, ~/Articles/ArticleHandler.aspx, 9/2/2014 5:22:08 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement