Stocks You Shouldn't Be Without

A few weeks ago, a 1909 T206 Honus Wagner baseball card sold at a Chicago auction for a cool $1.62 million. With fewer than a hundred Wagner cards estimated to be in existence, big press coverage ensues whenever one goes on sale. Last year, a near-mint version of the card was sold for $2.8 million!

Every baseball fan (including yours truly) would love to have one in their collection, but, in the end, it's just a piece of paper with a picture on it. See, a Honus Wagner card can't generate income while you hold it, and it's only worth as much as someone else is willing to pay for it.

That reminds me ...
When you get down to brass tacks, non-dividend-paying stocks share similar qualities to the Wagner card. In lieu of dividend payments, investors bank solely on capital appreciation to generate returns -- in other words, their stocks are only worth as much as someone else is willing to pay for them.

Of course, it is hard to resist the temptation of sexy growth stocks like Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) . On the other hand, dividend-paying stocks provide investors with more options when it comes to returning shareholder value. Not only do they contain the capital appreciation element of non-dividend-paying stocks, but they also periodically return a percentage of profits to shareholders in the form of cold hard cash.

That cash can then be used to invest in another stock, save for a rainy day, or buy a new pair of shoes. Try taking your old certificate to the shoe store and see how far it will get you...

Go on autopilot
If you believe in the future of the company, an even better option is to reinvest the dividend back in the stock and acquire more shares. Not only does this take the guessing game out of knowing when to add new money, but over time it can greatly augment your returns.

Consider the difference in returns for investors in these companies, assuming the first purchase was made on Aug. 15, 1998.


Return w/ Reinvested Dividends

No Reinvested Dividends







Apache (NYSE: APA  )






Qualcomm (Nasdaq: QCOM  )



Johnson & Johnson (NYSE: JNJ  )



*Source: Company websites.

Reinvesting dividends even just over a 10-year period can make a huge difference to your bottom line -- for Qualcomm investors it meant an additional 226% return! Moreover, reinvestment increases share count so whenever you decide to receive your dividends in cash form, you'll command a larger dividend than you would have otherwise. For example, Tupperware investors who chose to reinvest own 50% more shares than they would have had by just taking the cash.

A bird in the hand
Having a portion of your portfolio dedicated to dividend-paying stocks not only provides you with more options, but they can also boost your returns, reduce overall risk, and build steady income streams for retirement. Regardless of your age, they're simply the stocks you must own.

But not all dividend payers are created equal. Among other things, you should look for stocks with:

  • Top market position in its sector
  • Sustained history of dividend growth
  • Clear, defensible competitive advantage
  • Experienced management
  • Sufficient dividend coverage

Some ideas for you
If I were to pick a diversified group of five such stocks to fill out a core dividend-paying portfolio on these criteria, it would look something like this:


Dividend Yield

Payout Ratio


Johnson & Johnson



Health care





Southern Co.




Philip Morris International



Consumer Goods

Wells Fargo (NYSE: WFC  )








* 2008 estimated

This group of stocks provides you with a diversified stream of dividend income for years to come, and I'm confident it will deliver decent earnings growth to boot.

If you don't agree with my picks (hey, not everyone likes tobacco companies) or are looking for different ideas, we're offering a free 30-day trial to Motley Fool Income Investor where co-advisors James Early and Andy Cross find the best dividend payers on the market. To date, their picks are outperforming the market by seven percentage points on average. To see their full list of stocks as well as their best buys right now, click here. You'll be glad you did.

Todd Wenning's favorite baseball card is a signed Donruss 1989 Ken Griffey, Jr. rookie card. And no, it's not for sale, White Sox fans. He owns shares of Philip Morris International but of no other company mentioned. Tupperware Brands, Southern Co., and Johnson & Johnson are Motley Fool Income Investor picks. Google is a Motley Fool Rule Breakers recommendation. Apple is a Stock Advisor pick. Nothing can stop the Fool's disclosure policy.

Read/Post Comments (6) | Recommend This Article (26)

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 August 28, 2008, at 6:54 PM, prginww wrote:

    If the title says no one should be without these stocks, why do you not own them?


    Also, your description of the Honus Wagner card was a description of money.

    I don't expect the Fool to pump out insightful articles everyday (that's impossible), but it'd be nice if you guys didn't dilute your brand by repeating the same thoughtless permabull articles all the time.

  • Report this Comment On August 29, 2008, at 12:45 PM, prginww wrote:

    I respectively say I could not disagree more with your point about non-dividend-paying stocks generating returns solely on capital appreciation. I would also think the employees of Apple and Google would also disagree – because they are working making cold hard cash for the owners of the stock. As a stockowner of a non-dividend-paying stock, you are not simply waiting for the assets of the company to appreciate (someone will to pay more) you are benefiting from the fact that the company is collecting money – your money. The fact that the company does not pay it out in a dividend does not make it any less yours. However, I do agree there is nothing better than dividend check to guarantee the money is the hands and control of the stockowner. Still, there is a bigger difference between an idle asset (like a baseball card or unimproved land) and money making companies than there is between dividend and non-dividend paying companies. The trick is to evaluate the money making potential of the company with its current price whether the company pays out that money in a dividend is of lesser importance.

  • Report this Comment On August 29, 2008, at 1:03 PM, prginww wrote:

    rogerh11 is right, of course, when referring to small to average size investments where the number of shares receiving dividends doesn't compare to say, a 40,000 share stake in Exxon Mobile yielding $64,000 annually in dividends. That dividend payout or reinvestment is in addition to any stock value appreciation you may realize in the future.

    It's hard to ignore essentially free money.

  • Report this Comment On September 04, 2008, at 10:34 AM, prginww wrote:

    I don't understand why you would compare the returns with dividends to what it would have been excluding dividends. Like comparing apples to oranges.

    If the company did not pay dividends, they would have presumably reinvested more in the business, hopefully wisely, and may have generated even more value for the investor (tax deferred until cap gains time, of course). Sure the stock price is what others are willing to pay, but as you know that depends on the company's financial results and outlook for same.

    Do dividends matter?

    Until our quantum physicists figure out a way for us to run two parallel universes, one with dividends and one without, its impossible to know. (Yikes did i actually say that?)

  • Report this Comment On September 07, 2008, at 2:05 PM, prginww wrote:

    How does MF rate Anheuser-Busch's new subsidiary "9th Street Beverages":

    hold, buy, or sell?

  • Report this Comment On September 08, 2008, at 10:57 AM, prginww wrote:

    I am so confused with all the emails from you! I have a subscription to Income Investor but get suckered into looking at your emails only to spend 15 minutes and find it's another subscription!! Help! One is enough for now.

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