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Make Money While You Sleep

How have you been sleeping lately?

With more than 80% of the S&P 500 components, including Apple (Nasdaq: AAPL  ) , EMC (NYSE: EMC  ) , and ConocoPhillips (NYSE: COP  ) , in the red so far this year, it's understandable if you're feeling a bit restless these days. Losing money is scary, after all.

But, if the recent market craziness has been keeping you up at night, it may be time for a new investing strategy -- one that won't wake you up at 5 a.m. to check out the S&P futures on CNBC.

Count some sheep
While some investors enjoy following the daily market drama enough to force themselves out of bed before the sun rises, many of us (including yours truly) would much rather stay in bed and still remain confident in our investment choices.

A trickle turns into a flood
Dividend stocks may be considered boring by the majority of investors these days, but these "boring" stocks can help you build a family fortune and even supplement your income during retirement, all without disturbing your nightly slumber.

The power of dividends isn't a common topic in mass media, which tends to focus on supposedly newsworthy short-term price movements. Dividend stocks usually take years and decades to show their true value, but the wait is well worth it.

For instance, let's look at a one-time $10,000 investment in Anheuser-Busch (NYSE: BUD  ) made back in February 1988. At the time, you would have purchased 320 shares and you would have received a paltry $55 in dividends over the next year.

It wasn't all uphill for Anheuser-Busch's stock over the next 20 years. It dropped 20% or more on various occasions -- once between December 1991 and September 1993, and more recently, from June 2004 to February 2006.

Had you held that investment for 20 years -- through all of the stock's peaks and valleys -- your original investment would now be worth more than $60,000 and you'd be receiving more than $1,600 a year in dividend payments. Had you reinvested those 80 quarterly dividend payments, these figures would be even higher.

And that's another winning aspect of dividend stocks -- reinvesting takes the emotion out of buying decisions and forces you to make new investments each quarter, regardless of share price.

No sleeping pills!
Even though dividend-paying stocks will, on the whole, make you money in your sleep, that doesn't excuse you from periodic due diligence. Even the biggest, traditionally strong companies can fall hard.

Xerox (NYSE: XRX  ) , for example, once the bluest of the blue chips, fell from grace at the turn of the century, losing more than 90% of its value between June 1999 and December 2000.

What happened? Among other things, Xerox lost its competitive advantage to the likes of Hewlett-Packard (NYSE: HPQ  ) and Canon (NYSE: CAJ  ) , and profits declined dramatically. Once a solid, reliable, dividend-paying stock, by February 2001, Xerox stopped paying dividends altogether. (It recently resumed the dividend.)

Sleep well, my liege
With dividend-paying stocks, investors can sleep easier knowing that they're making money no matter how volatile the market is in the short term. To ensure that there are no unexpected nightmares, however, investors need to:

  • Pick solid, well-positioned companies,
  • With a track record of increasing dividends, and
  • Be patient but observant.

Need some starting ideas? James Early and Andy Cross recommend stocks that fit this description to subscribers of Motley Fool Income Investor each month. On average, Income Investor picks are outpacing the S&P 500 by eight percentage points.

Want to sleep on it? A free 30-day trial is yours for the clicking.

Fool contributor Todd Wenning would like to congratulate the St. Joseph's Hawks on their defeat of Villanova. He does not own shares of any company mentioned. Anheuser-Busch is a Motley Fool Inside Value pick. Apple is a Stock Advisor recommendation. The Fool's disclosure policy is going back to bed now.

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10/25/2016 4:00 PM
AAPL $118.25 Up +0.60 +0.51%
Apple CAPS Rating: ****
BUD $123.78 Down -1.30 -1.04%
Anheuser-Busch InB… CAPS Rating: *****
CAJ $29.38 Down -0.10 -0.34%
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COP $41.81 Down -0.43 -1.02%
ConocoPhillips CAPS Rating: ****
EMC $0.00 Down +0.00 +0.00%
EMC CAPS Rating: ****
HPQ $13.90 Down -0.07 -0.50%
HP CAPS Rating: ***
XRX $9.61 Down -0.07 -0.72%
Xerox CAPS Rating: ****