Tremendous Growth, Year After Year

While the S&P 500 index has risen every year since 2002, it's probably safe to say that trend is unlikely to continue.

Unfortunately, there's nothing you can really do to completely insulate your portfolio from the kind of price volatility we've seen this year. You can, however, pay extra attention to one key component to dramatically improve your odds of seeing reliable, strong growth, year after year. There's a very important part of your total return that does not depend at all on a stock's performance.

There is a difference
Historically, stocks that pay a dividend have absolutely crushed their non-dividend-paying counterparts. That's in large part because those payments are set by a company's board of directors, not the whims of the stock market. If that board is worth one-tenth of what you pay its members, it'll set a rational dividend policy that:

  • Rewards owners based on the sustainable success of the business.
  • Rises over time based on the company's expected growth.
  • Permits the company enough financial flexibility to handle challenges.
  • Still allows the company to reinvest enough to continue to grow.

And yes, those boards know that current and potential future investors look at a company's dividend policy as the clearest signal that the company sends about its prospects. Because of that scrutiny, boards tend to take their dividends very seriously. In fact, once it’s set, most companies won't lower their dividend until it becomes painfully obvious that they have no other choice.

Get your growth
As a result, a company that pays a strong dividend, has routinely raised that dividend, and still manages to grow its business and profits doesn't get to that place by accident. It takes deliberate planning, management, and dedication to make such a feat possible. Once it's there, you can buy the company's stock and take advantage of that regular dividend growth.

As this table shows, the rewards can certainly be worth the wait:

Company

1997
Dividends

2007
Dividends

Annualized
10-Year
Growth

Allstate (NYSE: ALL  )

$0.48

$1.52

12.22%

Cintas (Nasdaq: CTAS  )

$0.03

$0.39

31.62%

Johnson & Johnson (NYSE: JNJ  )

$0.43

$1.62

14.32%

Kinder Morgan Energy Partners (NYSE: KMP  )

$0.76

$3.39

16.13%

Nordstrom (NYSE: JWN  )

$0.13

$0.54

15.08%

Teleflex (NYSE: TFX  )

$0.39

$1.25

12.38%

Walgreen (NYSE: WAG  )

$0.12

$0.35

11.21%

All data split-adjusted.

While the dividends you get today may seem small, just look how far they can grow in just a decade, with no extra investment or work on your part. It's what you can wind up with, when both you and a company's board of directors focus on the business' long-run capabilities rather than its stock price.

This is an especially important consideration in today's volatile market. While the true power of dividend payments may otherwise seem insignificant to those who don't pay attention, they can really add up over the years.

That's our belief at Motley Fool Income Investor, where we recommend dividend payers with the financial strength to deliver long-term performance. Since inception in 2003, we've managed to stay ahead of the market by more than seven percentage points.

If you'd like see our top dividend stocks right now, click here to try the service for free with a 30-day guest pass.

At the time of publication, Fool contributor Chuck Saletta owned shares of Johnson & Johnson and Kinder Morgan Management, a related company to Kinder Morgan Energy Partners. Johnson & Johnson is an Income Investor pick. Teleflex is an Inside Value selection. The Fool's disclosure policy keeps growing in importance.


Read/Post Comments (5) | Recommend This Article (41)

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.

  • Report this Comment On July 15, 2008, at 4:37 PM, ricgre wrote:

    I will continue to buy KMP as long as they continue to expand their inferstructure.

  • Report this Comment On July 15, 2008, at 6:32 PM, slade15342 wrote:

    One of the best articles any new investor can read. I never really caught onto this until I kept looking at the divident Phillip Morris (Now Altria) was putting out, and my friend was laughing as he kept dividend reinvesting. No I just shake my head and wish I mirrored his moves, taken a long nap, and then emerged 5 years later with a very pleasant surprise.

    And thanks to this article, I am reminded that I need to feature Cintas on thegearedinvestor.com

    Cheers

  • Report this Comment On July 15, 2008, at 7:30 PM, IBleedConcrete wrote:

    "Annualized 10-Year Growth" should read "Annualized 10-Year Dividend Growth", otherwise people might think that it is the compound annual growth rate (a much more useful measure).

    Cintas' ten year dividend growth has been 32% but that has very little bearing on whether it is a good investment. In fact the stock has gone nowhere in the last 10 years and the yield is still only 1.8%. It has performed terribly and will probably continue to.

  • Report this Comment On July 15, 2008, at 10:12 PM, FOOLBEFREE wrote:

    I own Walgreen stock. In addition to the dividend, I sell covered calls and get at least 12% to 15% a year extra.

    If you sell the August 32.50 call, they give you $110 dollars for one contract, that on a $3233 investment (100 shares X 32.33-> current price) is $110/3233 = 3.4% in 32 days.

    In this bear market, 3.4% a month is very good. I have been doing covered calls on many on my stocks.

  • Report this Comment On July 18, 2008, at 4:26 AM, dividendgrowth wrote:

    Where will the future growth for WAG come from? Do we really need more pharmacies than Starbucks?

    Since each country has its own pharmacies, WAG is not going to expand internationally anytime soon.

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