The Investing Secrets of the Richest Man the World Has Ever Known

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in."

Who said that? Some elderly retiree in Florida?

Nope. None other than oil man John D. Rockefeller, the wealthiest man the world has ever known. On inflation-adjusted terms, Rockefeller's early-20th-century fortune is estimated by Forbes to be more than $300 billion today -- roughly five times the wealth of today's richest man, Carlos Slim.

Making money
John D. Rockefeller had two goals in life:

  1. Make $100,000.
  2. Live to be 100 years old.

While he failed to achieve the second goal (by only 26 months), he satisfied the first one more than 1,000 times over.

Rockefeller quickly learned that the fastest and easiest way to make money was to sell "real" products that every household needed. When he discovered that crude oil could be refined into kerosene, a high-quality illuminating oil for lamps (automobiles and their need for gasoline would come later), Rockefeller saw the opportunity to help every U.S. family light up its house and jumped into the oil business in 1863.

By 1880, he was in control of 95% of U.S. oil production. His company, Standard Oil, was a model of cost efficiency and vertical integration that controlled every stage of oil production, refining, and distribution. By age 41, Rockefeller realized that he knew how to make tons of money:

I believe the power to make money is a gift from God -- just as are the instincts for art, music, literature, the doctor's talent, yours to be developed and used to the best of our ability for the good of mankind. Having been endowed with the gift I possess, I believe it is my duty to make money and still more money.

One decision can guarantee wealth
Rockefeller gave up control of the day-to-day operations of Standard Oil in 1896, but he made one decision upon his departure that assured he would spend the remaining 41 years of his life an extremely wealthy man: He held on to his Standard Oil shares and the dividends they provided.

Year in and year out, he collected Standard Oil dividend checks and enjoyed steady capital appreciation from the stock until the day he died.

The U.S. Supreme Court ruled in 1911 that antitrust law required Standard Oil to be broken into smaller, independent companies. Among the "baby Standards" that still exist are ExxonMobil and Chevron. If not for that court ruling, Standard Oil would be worth more than $1 trillion today.

Rich people stay real
Real products -- like oil -- generate real cash from current-day customers, and companies can distribute that cash as dividends to shareholders. Unlike earnings or corporate cash flow, which can be faked or frittered away by management, dividend cash is yours to keep.

The super-rich have always known that dividend-paying stocks consistently outperform non-dividend-paying stocks over the long term. According to Wharton finance professor Jeremy Siegel, 97% of the total after-inflation return of stocks between 1871 and 2003 came from reinvesting dividends. Only 3% came from capital gains!

Invest like the best
Rockefeller, by means of his "gift from God," must have sensed this dividend bonanza long before academic research proved it. What would John D. Rockefeller invest in today if he were still alive? Impossible to say for sure, but oil stocks are a good bet.

In fact, the Rockefeller family fortune today is invested in a trust, Rockefeller Financial Services. The trust holds a large slug of blue-chip stocks including some energy stocks. Below are seven of the trust's most recent buys, all of which pay dividends and most of which are highly ranked in Motley Fool CAPS:

Company

P/E Ratio

Dividend Yield

CAPS Rating*

Wal-Mart (NYSE:WMT)

16

1.9%

**

Praxair (NYSE:PX)

25

1.4%

*****

BP (NYSE:BP)

12

3.6%

*****

Honeywell International (NYSE:HON)

18.5

1.8%

*****

Aflac (NYSE:AFL)

19

1.8%

*****

Procter & Gamble (NYSE:PG)

23

1.9%

*****

Home Depot (NYSE:HD)

12

3.2%

**

Source: Stockpickr.com. *Out of five stars.

Obviously, real wealth cannot be achieved simply by picking any old dividend-paying stock. You have to pick the cream of the crop -- stocks that exhibit most, if not all, of the following market-beating characteristics:

  • Great management: Management background, corporate governance, and strong insider ownership are key drivers of operational (and stock) returns.
  • Financial fortitude: Companies that are solid financially -- strong enough to keep themselves afloat through good times and bad -- are most likely to keep their dividend promises for years to come.
  • Competitive advantage: Companies that are low-cost providers or offer unique products that are incapable of being copied are highly profitable and are sure-fire winning investments for the long term.

These are the type of dividend stocks selected every month in James Early's and Andy Cross' Income Investor newsletter (which also happens to have recommended quite a few energy stocks). Pick up a free 30-day guest pass, and see for yourself how the team's recommendations have beaten the market by "staying real" and investing like the Rockefellers.

This article was first published Oct. 16, 2007. It has been updated. 

Jim Fink was John D. Rockefeller in a past life. He does not own any shares in the companies mentioned, but his dad proudly owns a bundle of ExxonMobil. Home Depot and Wal-Mart are Motley Fool Inside Value selections. Aflac is a Stock Advisor pick. The Motley Fool is investors writing for investors.


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