Sure, there are folks who have become rich finding stocks like Hansen Natural (Nasdaq: HANS) or Celgene (Nasdaq: CELG) when they were micro caps, then staying with them until their market cap is well over $1 billion. Others have become wealthy with smart options plays, still others by discovering high-momentum growth stocks like Amazon.com (Nasdaq: AMZN) or Intuitive Surgical (Nasdaq: ISRG) before other investors catch on.
But these complicated, labor-intensive tactics are ones that many investors don't have enough time to master.
I'd like to share with you a simple, easy strategy for becoming wealthy -- and then give you stock recommendations based on it. Although it's simple, it takes discipline to adhere to the rules. But if you follow this advice, you'll be well on your way to a million-dollar portfolio.
Keep it simple
One of the biggest mistakes investors make is complicating the process. Academics have proven that more information doesn't necessarily lead to better decisions -- but it does lead to overconfidence. Even worse, the more time and effort you put into researching, analyzing, and deciding whether to buy a stock, the more likely you are to buy it -- even if it's a horrible stock after all.
Overconfidence and overcommitment are counterproductive in investing -- and it's why keeping your investment criteria simple and easy can help you avoid falling into these traps.
What sort of criteria am I suggesting? Just two steps:
1. Find strong, long-term dividend-paying companies.
Dividends are the surest gains you can find in any market environment. As Bloomberg recently reported, even though the 10-year trailing return of the Dow Jones Industrial Average was negative through Sept. 30, when you factored in dividends, the return was actually a positive 18%.
What's more, between January 1926 and December 2004, 41% of the S&P 500's total return came from dividends. Without dividends, a $10,000 investment in 1926 would have become $1,013,000 by 2004 -- a remarkable return, to be sure. But with dividends, $10,000 would have become $24,113,000.
It's best to look for companies with a long history of paying out dividends. If a company only has a few years of dividend history under its belt, those payouts might be cut or suspended to fuel future growth -- as happened at Whole Foods (Nasdaq: WFMI) and DryShips (Nasdaq: DRYS) during this bear market.
Of course, that didn't stop many former stalwarts from cutting their payouts over the past year. So it's also wise to find companies with a culture of insider ownership and enduring demand. And you should also find companies with predictable, sufficient free cash flow, so you can be reasonably sure these dividends will continue to be paid. This is often easier said than done, but just below I'll tell you whom I look to for help in this regard.
But now for the hard part ...
2. Hold forever.
The strongest of dividend-paying companies raise their dividend over time. So when you hold one for long enough, you eventually reach a point where you are making more money annually in dividends than you initially invested in the company.
This is hastened when you reinvest your dividends back into the company, with each dividend purchasing even more shares of the company, meaning even more payout at the next quarterly dividend.
So long as the business continues to perform, and the company continues to maintain or raise its payouts, the simplest and oftentimes most lucrative approach is to remain an owner and collect your dividends.
Implement this strategy today
Motley Fool dividend expert James Early has seven "buy first" stocks for members of his Motley Fool Income Investor newsletter service, and they have an average yield of 3.8%. These stocks are, in his opinion, timeless investments that should serve as the foundation for a dividend-paying portfolio -- stocks you can feel comfortable holding for decades.
One of the companies on this list is legendary dividend payer Johnson & Johnson (NYSE: JNJ), which is yielding 3.3%. This company, which has paid out a dividend since 1944, not only has a long dividend history, but also has a long history of increasing its dividend. Over the past five years alone, it has grown its dividend annually by an average 12%. Better yet, it's trading well below James' estimate of its intrinsic value.
We've seen more than a fair share of dividend blowups over the past year, but if you look for the three criteria I outlined above when looking for dividend-paying companies -- insider ownership, a company with enduring demand, and sufficient free cash flow -- you are following the easiest way to become a millionaire.
I invite you to read more about why James believes Johnson & Johnson is a strong core dividend holding, check out the six other stocks on his "buy first" list, and read more about how he uncovers top-notch dividend investments, completely free for 30 days. Click here for more information.
Adam J. Wiederman
doesn't own shares of the companies mentioned above. Hansen Natural and Intuitive Surgical are Motley Fool Rule Breakers selections. Amazon.com and Whole Foods are Stock Advisor recommendations. Johnson & Johnson is an Income Investor recommendation. The Fool's disclosure policy is outlined here.
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