My Big Fat Dividends

If your portfolio's looking a little scrawny, try fattening it up with the portly power of dividends.

Especially when reinvested, dividends can make up a jumbo-sized chunk of the overall return of many stocks. As my colleague Shannon Zimmerman explained, between January 1926 and December 2006, "41% of the S&P 500's total return was due not to the price appreciation of the stocks in the index, but to the dividends its companies paid out."

Chasing chunky yields
The only thing fatter than those gargantuan returns? The yields on the market's most terrifically tubby dividend payers. Sink your teeth into these juicy dividends:

Company

Recent Yield

Pfizer (NYSE: PFE  )

4.1%

Nokia (NYSE: NOK  )

4.2%

Bristol-Myers Squibb (NYSE: BMY  )

5.2%

Duke Energy

5.9%

Data: CAPS.Fool.com.

Even if the market weathers lean times, as it did in 2008, if you're invested in solid dividend payers, you'll keep piling on fat and happy rewards.

The key is being picky when you select dividend payers. Don't fall for high yields without doing your research. As noted above, Duke Energy sports a tantalizing yield, but its payout ratio recently topped 100%. That means it wasn't generating enough income to cover its dividend obligation.

Sometimes, high payout ratios are just a temporary glitch; other times, they signal a significant problem with the underlying stock. Either way, they're always worth investigating.

Gargantuan growth
Whether you invest in companies offering yields of 2% or 5%, dividend payers can help your portfolio pack on the pounds -- provided they keep hiking their yields, as most healthy and growing companies do. Here are just a few examples:

Company

Recent Yield

5-Year Avg. Dividend Growth Rate

Coca-Cola (NYSE: KO  )

3.0%

9.0%

Johnson & Johnson (NYSE: JNJ  )

3.1%

11.7%

Kraft Food (NYSE: KFT  )

4.1%

9.2%

Novartis (NYSE: NVS  )

3.7%

19.5%

Data: CAPS.Fool.com.

These yields aren't eye-popping now, but look how fast they might grow! That sort of steady expansion can turn merely chubby dividends into downright zaftig ones. Growing at 9% annually for 10 years, Coke's 3% yield will become an effective 7% yield, based on your initial purchase price.

I'm loving this effect in my own portfolio. When I bought Johnson & Johnson shares years ago at $43 apiece, my yield was just 1.9%. Now, my effective yield is 4.6% -- while those who buy today are starting out with a 3.1% yield.

Amassing appreciation
Best of all, if you've invested in great companies, you can expect to enjoy long-term stock-price appreciation on top of that dividend growth.

I hope you see by now that dividends are a big, fat, compelling proposition. That's our belief at Motley Fool Income Investor, and our pleasantly pudgy picks are beating the market with an average current yield of more than 4%. With a free, 30-day trial, you can even see which seven stocks our team recommends as "buy first" stocks. Click here to learn more.

Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola, Novartis, and Johnson & Johnson. Coca-Cola, Nokia, and Pfizer are Motley Fool Inside Value selections. Novartis AG is a Global Gains pick. Duke Energy, Johnson & Johnson, and Coca-Cola are Income Investor choices. Motley Fool Options has recommended buying calls on Johnson & Johnson. The Fool's disclosure policy knows how to throw its weight around.


Read/Post Comments (21) | Recommend This Article (40)

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 February 20, 2010, at 1:12 PM, bobbyeubanks wrote:

    Sheesh, when will Selena Maranjian learn that "effective yield" is meaningless? Every stockholder has the same yield. Purchase price is irrelevant to yield.

  • Report this Comment On February 20, 2010, at 1:13 PM, bobbyeubanks wrote:

    Sheesh, when will Selena Maranjian learn that "effective yield" is meaningless? Every stockholder has the same yield. Purchase price is irrelevant to yield.

  • Report this Comment On February 20, 2010, at 2:42 PM, TMFSelena wrote:

    Bobby --

    I see your point, but I also see it another way. If I paid $10,000 for a stock way back when and I'm now collecting $2,000 on it annually, that's an "effective" 20% yield on my initial cost. It's just a way to evaluate what that investment is doing for me.

    It's true that I could have deployed my money elsewhere and earned different returns, but I chose to invest in this way, and now receive a certain yield on my investment. (Plus stock-price appreciation, one hopes)

    I'm not the only one talking about effective yield:

    http://www.google.com/search?hl=en&source=hp&q=%22ef...

    Best wishes,

    Selena

  • Report this Comment On February 20, 2010, at 3:12 PM, goalie37 wrote:

    I agree with Selena. Yes, it is true you could sell and reinvest in a different security at today's growing rate, but the same would be true of a bond, yet in that case we look at the rate where we bought in.

  • Report this Comment On February 20, 2010, at 10:54 PM, ozzfan1317 wrote:

    NUE is another solid yielder very conservatively run despite its cylical nature

  • Report this Comment On February 21, 2010, at 12:19 PM, bobbyeubanks wrote:

    Selena,

    Here is why you are wrong: if you have a stock with an effective yield of 20% and an actual yield of 1% and EE bonds are going for 10%, which would you rather have?

    Sure, potential stock appreciation would play into the decision, but from a pure income perspective, this is a no-brainer decision: the EEs are 10x better. But with your effective yield, the stock looks 2x better. Effective yield is never useful in making a financial decision.

  • Report this Comment On February 21, 2010, at 7:42 PM, TMFSelena wrote:

    Bobby --

    <<Here is why you are wrong: if you have a stock with an effective yield of 20% and an actual yield of 1% and EE bonds are going for 10%, which would you rather have?>>

    I'm not saying that one should necessarily choose an effective 20% yield over a 10% yield. I'm just showing what an effective yield is. You might determine that yes, your effective yield on your purchase price is an impressive 20%, but that you can now deploy that money elsewhere for better results. Or not. The effective yield isn't necessarily a decision maker for you, but just some information that reflects how your investment has been serving you.

    Cheers,

    Selena

  • Report this Comment On February 22, 2010, at 11:52 AM, bobbyeubanks wrote:

    OK, so where is effective yield actually useful? You claim it is good to have a stock with a high effective yield, but you give no indication as to why or how you use the effective yield other than to brag. I hold that it never is useful. Even using for bragging rights is a stretch. It somewhat represents capital growth of the stock, but why not simply use the actual growth instead?

  • Report this Comment On February 22, 2010, at 8:01 PM, JudasTouch wrote:

    Effective yield is another data point that can be useful in less narrowly constructed scenarios as the 10% EE bond one.

    Why the venom?

  • Report this Comment On February 22, 2010, at 11:18 PM, bobbyeubanks wrote:

    10% is high, certainly. But even at 3%, my post is valid. And effective yield is never useful for financial analysis. NEVER. Not even in any narrowly constructed scenario. The "venom" is simply because this "expert" has been posting about how great "effective" yields are for years, without ever giving an actual reason why they are good even when people keep telling her she is wrong.

    The only thing a high effective yield compared to the actual yield means is that you bought the stock at a low price. Why not just write articles about how great it is to buy stock at low prices?

  • Report this Comment On February 23, 2010, at 12:38 AM, bobbyeubanks wrote:

    Argh, this is why I complain about the effective yield articles. Growing dividends are great, no doubt. Growing stock price is great, no doubt. But what do you use the effective yield for? Are you actually using it for any decision? Why can't any fan of effective yield tell me why it is useful for anything other than bragging? Answer: because it isn't. And using it for bragging might blind you into thinking it is a better investment than others available.

  • Report this Comment On February 23, 2010, at 11:11 AM, bobbyeubanks wrote:

    But you aren't using effective yield. You may think you are using a _projected_ effective yield, but really all you are using is projected dividend growth to make your decision.

  • Report this Comment On February 23, 2010, at 12:13 PM, bobbyeubanks wrote:

    But you aren't using effective yield. You may think you are using a _projected_ effective yield, but you are actually just using projected dividend growth. Which is just fine. But for the complete picture, you should use projected stock price growth in conjunction with projected dividend growth. Projected effective yield leads to an incomplete picture.

    So again, when is using actual effective yield useful?

  • Report this Comment On February 23, 2010, at 12:27 PM, LegalizeMe wrote:

    Symbol: LARK

    5.1% Dividend and only $15 a share. It's a regional bank with highly conservative lending practices (it's a Kansas only bank after all).

  • Report this Comment On February 23, 2010, at 2:04 PM, georcole wrote:

    @bobbyeubanks

    I tend to agree with your point of view for the most part. I reinvest my dividends, so if the stock is yielding 5%, I will wind up with roughly 5% more shares by the end of the year. It doesn't matter what my cost basis is.

    However, if I were to take the cash instead, my "income" could go up over time and I could start receiving 20% payouts on my investment. Only for long term planning such as this do I see any use when making a selection for new money.

  • Report this Comment On February 24, 2010, at 4:28 PM, MLPguy wrote:

    I agree that yield on cost - purely on its own - is not a good metric in deciding how to allocate new capital. Even if someone invested in a slow-growth, low yield company, time, inflation, and modest dividend growth could make a single mediocre investment look brilliant. The human brain often struggles with calculating compound interest over long periods of time (20+ years). Even a 2000% gain can be mediocre if it took you 50 years to get it.

    Yet combined with other factors, it can be a powerful tool. I use it as an indirect reminder of what has worked well in the past, as it reflects which companies have grown dividends consistently over time. Companies that have grown dividends over time, (with a few major exceptions, of course) tend to continue to grow their dividends in the future.

    Many 'investors' become far too active, moving from one company to another without real thought. I find using yield on cost creates an effective psychological barrier against this excessive movement. When I find a good idea, I can let it compound and treat it as a business, not a piece of paper (or rather, bit of electronic data). I'm not blind to other information, of course, but it helps me become more skeptical of new investment opportunities and avoid excess optimism in things I don't know as well and my older investments.

    In short, it's not useful mathematically or analytically for new investments. But it is very useful psychologically.

  • Report this Comment On February 24, 2010, at 4:56 PM, CPTVo wrote:

    Thanks Bobby. That was insightful. I disagreed with you at first until I read the whole thing. It is useless other than for bragging rights.

  • Report this Comment On February 25, 2010, at 12:54 AM, mikecart1 wrote:

    bobbyeubanks, you need to stop picking at Fool article writers.

  • Report this Comment On February 25, 2010, at 12:54 AM, mikecart1 wrote:

    bobbyeubanks, you need to stop picking at Fool article writers.

  • Report this Comment On February 25, 2010, at 10:37 PM, TMFKopp wrote:

    @bobbyeubanks

    It seems like you're primarily fired up about the idea of effective yield being used as a decision-making tool. But unless I'm missing something, it doesn't appear to me that Selena has suggested in her article that it is a decision-making tool. Rather, she's used it as an illustration of why a growing dividend is a great thing.

    Matt

  • Report this Comment On February 27, 2010, at 2:40 PM, hawaiisucks wrote:

    Dividend Aristocrats are companies in the S&P 500 that have increased dividend payouts to shareholders every year for the last 25 years:

    http://www.TopYields.nl/Top-dividend-yields-of-Dividend-Aris...

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