Why should late-night DJs get to offer all the dedications? I hereby dedicate this article to newcomers to the investing arena, to people who've freed up some cash to invest, and to those who understand that this sluggish stock market presents them with a rare and exciting opportunity.
If you're ready to invest, you may be facing one big question: which stocks to start with. After all, there are thousands to choose from. You could take the easy (and quite reasonable) route and invest in a broad-market index fund. Even investing great Warren Buffett believes that most people are better off following that strategy.
But to aim even higher, you may want to put some or all of your money in individual stocks. And in my opinion, healthy dividend payers could be the best place to start your search.
Start with reliability
To look for the cream of the crop in the dividend world, take a gander at Standard & Poor's list of Dividend Aristocrats. (My colleague Joe Magyer offers some other excellent dividend-seeking tips.)
The Aristocrats are S&P 500 companies that have increased their dividends every year for at least 25 years. Here are two Aristocrats you might consider for your portfolio, along with their dividend growth rates:
|
Company
|
Recent Dividend Yield
|
5-Year Average Annual Dividend Growth Rate
|
|
Becton, Dickinson (NYSE: BDX )
|
1.9%
|
23%
|
|
Abbott Labs (NYSE: ABT )
|
3.4%
|
8%
|
Sources: Standard & Poor's, MSN Money.
Of course, you needn't require a 25-year history of dividend increases. Here are five more companies to consider -- with sizable yields and five-year average annual dividend growth rates of at least 10%:
|
Company
|
Recent Dividend Yield
|
5-Year Average Annual Dividend Growth Rate
|
|
Clorox (NYSE: CLX )
|
3.6%
|
14%
|
|
Home Depot (NYSE: HD )
|
3.9%
|
28%
|
|
Paychex (Nasdaq: PAYX )
|
4.7%
|
22%
|
|
Sunoco (NYSE: SUN )
|
5.1%
|
18%
|
|
Vodafone (NYSE: VOD )
|
8.1%
|
27%
|
Source: CAPS.Fool.com, Yahoo! Finance.
When evaluating dividend payers, consider more than just the current yield. A company offering a yield of 5% might seem more attractive than a company of seemingly equal quality paying 3%. But if the former company features irregular and anemic dividend increases, while the latter has averaged 12% annual hikes, that 3% will become more than a 5% effective yield for you in just a few years. And over 10 or 20 years, that accumulation could really pack a punch.
What makes dividends so important?
It's not exactly a secret: Dividends accounted for 41% of the S&P 500's return between 1926 and 2006. And according to Ned Davis Research, between January 1972 and April 2009 (a period that included booms and busts), dividend payers returned 7.8% annually, crushing the 0.7% annual return of stingier stocks.
Even if their stock itself stalls, healthy, growing companies will keep paying you their dividend. During 2008, many solid companies actually increased their dividends.
The two Aristocrats and five bonus companies I've listed for you aren't formal recommendations -- just good starting points for your own due diligence. Nor are they the only dividend candidates for your portfolio. We'd love to introduce you to other ideas, along with some valuable lessons in dividend investing, with a free 30-day trial to our Motley Fool Income Investor advisory service. On average, its picks are beating the market handily, even as they offer an average current yield of 5.5%. Click here to learn more about a free 30-day trial (there's no obligation to subscribe).
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This article was originally published on May 23, 2009. It has been updated.
Longtime Fool contributor Selena Maranjian owns shares of Home Depot and Paychex. Home Depot and Paychex are Motley Fool Inside Value recommendations. The Motley Fool is Fools writing for Fools.
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