The Easiest Way to Become a Millionaire

Sure, there might be folks who got rich by finding companies like Hansen Natural when they were small caps, then selling when their market caps grew larger than $2 billion.

Others recently got rich with bold contrarian plays, buying seemingly down-and-out financial companies like American Express and JPMorgan Chase at their 52-week lows, and more than doubling their money since.

Some investors became wealthy with smart options plays; still others by purchasing recent high-momentum growth stocks such as Vertex Pharmaceuticals and Green Mountain Coffee Roasters before other investors caught on.

But many -- I would argue most -- individual investors don't have enough time to master these complicated, labor-intensive tactics.

I'd like to share with you a simple, easy strategy for becoming wealthy -- and then give you a stock recommendation based on it. Although it's not complex, 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 -- just 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. That'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 simple steps:

1. Find strong, long-term dividend-paying companies.
Dividends are the surest gains you can find in any market environment -- most especially a market downturn. As Bloomberg recently reported, the 10-year trailing return of the Dow Jones Industrial Average was negative through Sept. 30, 2009. But when you factored in dividends, the return was actually a positive 18%. And that was through the worst decade in years!

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.

Of course, that didn't stop dividend-paying stalwarts MBIA (NYSE: MBI  ) and The New York Times (NYSE: NYT  ) from eliminating their payouts. The lesson learned from these dividend cuts is that it's important to find companies with a strong culture of insider ownership and enduring, sustainable demand. And investors should be wary about these companies' financial footing going forward.

And you should also find companies with predictable, sufficient free cash flow, and reliable lines of business, so you can be reasonably sure these dividends will continue to be paid. This is easier said than done, but just below, I'll tell you whom I look to for help in this regard.

But first, for the hard part ...

2. Hold forever.
The strongest dividend-paying companies raise their dividends over time. So when you hold one for long enough, you eventually reach a point where you're 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 most lucrative approach is to remain an owner and continue collecting your dividends.

Here are four strong dividend-paying companies that would make sense buying today:

Company

Market Cap

Dividend Yield

5-Year Dividend Compounded Annual Growth Rate

China Mobile (NYSE: CHL  )

$202 billion

3.6%

28.7%

McDonalds (NYSE: MCD  )

$76 billion

3.1%

30.7%

Southern Company (NYSE: SO  )

$28 billion

5.3%

4.1%

Costco (Nasdaq: COST  )

$26 billion

1.4%

12.5%

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, with an average yield of 3.5%. In his opinion, these stocks are 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  ) , currently yielding 3.3%. This company, which has made payouts since 1944, also has a long history of increasing its dividend. Over the past five years alone, it has grown its dividend annually by an average of 12%. Better yet, it's trading well below James' estimate of its intrinsic value.

We've seen more than our fair share of dividend blowups over the past few years, 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're 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 five other stocks on his "buy first" list, and discover how he uncovers top-notch dividend investments, completely free for 30 days. Click here for more information.

This article was originally published Oct. 27, 2009. It has been updated.

Adam J. Wiederman  owns shares of China Mobile, a Global Gains recommendation. The Motley Fool also owns shares of China Mobile. American Express is a Motley Fool Inside Value selection. Green Mountain Coffee Roasters, Hansen Natural, and Vertex Pharmaceuticals are Motley Fool Rule Breakers recommendations. The Fool's disclosure policy is outlined here.


Read/Post Comments (3) | Recommend This Article (8)

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  • Report this Comment On April 30, 2010, at 3:29 PM, charliecigars666 wrote:

    Such an easy and simple concept!

    Don't make it complicated!

    Thanks, Charliecigars666

    suchsimple and easy ideas.

  • Report this Comment On April 30, 2010, at 4:52 PM, JohnnyJay wrote:

    The best way to look at this concept once you are in retirement or very close is look for stocks that pay the steady income(dividends) on a quarterly basis. First of all reinvest these dividends that will increase your total shares, thus higher div. amount later when you need it. I have held several top quality stocks for over 20+ years & reinvested all the dividends. I am now retired & living off a very nice dividend income without worry. I am not concerned about the value of these stocks as I have no intention of selling unless a serious illness occurs. If I do sell it will be the stock that pays the lowest dividend payout so my income level will remain the same as the other stocks will increase their rate the following year.

  • Report this Comment On May 03, 2010, at 5:23 AM, Mooncents wrote:

    Being a new but late starter at investing, this is a great strategy to follow when you are in your 20's or 30's. But the only real problem I can see is if you do not have a substantial amount to invest it is not practical, considering dividend paying stocks (at least these listed) are over $30+ a share.

    But I guess like all things you have to start some where.

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