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 destitute 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 the equivalent of more than $300 billion today -- roughly five times the wealth of today's richest man (Carlos Slim, Bill Gates, or Mukesh Ambani, depending on the time of day and whom you ask).

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

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

He failed to achieve the second goal by only 26 months, but 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, jumping into the oil business in 1863.

By 1880, he controlled 95% of U.S. oil production. His company, Standard Oil, was a model of cost efficiency and vertical integration, overseeing 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 when he left 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. The "baby Standards" still in existence include Exxon Mobil and Chevron. If not for that court ruling, Standard Oil would be worth more than $1 trillion today.

Rich people keep 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 a good bet would be energy stocks that pay solid dividends.

I ran a screen on Capital IQ, an institutional financial software package, for energy stocks on a major U.S. exchange that yield at least 4%, have a debt-to-capital ratio below 50%, and have a three-year average earnings per share growth rate of more than 10%. Six of the stocks that passed this tough screen are listed below:

Of course 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 they're surefire winning investments for the long term.

These are the types of dividend stocks selected every month in James Early and Andy Cross' Income Investor newsletter, which in fact recommends 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." 

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

Jim Fink would be happy to be as wealthy as John D. Rockefeller's left pinky. He does not own any shares in the companies mentioned, but his proud dad owns a bundle of Exxon Mobil. Alliance Resource Partners is a Motley Fool Income Investor recommendation. The Motley Fool is investors writing for investors.