The Best Dividend Stocks of the Decade

It's true that past performance is not indicative of future returns, but that doesn't mean we can't learn from it. By identifying key traits of investments that have worked well, we can narrow down our search for great stocks by seeking those traits in current opportunities.

Looking back at which stocks succeeded over the 10 years that ended in 2009 is a particularly intriguing and unique exercise, given that the S&P 500 was down over that period. Indeed, it was the first time the index had finished a calendar decade with a negative total return.

As with any decade, it had its share of big winners and losers alike. Still, most investors who put money to work 10 years ago have been disappointed with their returns (the more they invested in Pets.com, the larger the disappointment).

The horse is dead already
Yet for every "new" economy stock that got clobbered after the dot-com bubble burst, there were plenty of "old" economy stocks that were ripe for the taking in December 1999, when investors' attention was focused on Web clicks rather than cash-flow generation.

Given that the old-economy industries -- energy, industrials, commodities, railroads -- were largely in the mature phase of their business cycles by 1999, many of them paid dividends to boot. This made these undervalued, out-of-style stocks even more attractive as long-term investments.

To illustrate, I've gone back and identified the best dividend-paying stocks of the past decade, based on the following criteria:

  • The company had to pay dividends each year.
  • It was not allowed to cut or suspend the dividend at any point.
  • It must be U.S.-based, trading on a major U.S. exchange.

I've further subdivided the results by 1999 market capitalization: large cap, mid cap, and small cap.

The envelope, please
Here are the top five large-cap dividend payers of the past decade ...

Company

Industry

Dividend-Adjusted Return
(Dec. 31, 1999 - Dec. 31, 2009)

Burlington Northern Santa Fe 

Railroad

381%

Southern Co. 

Utility

277%

Altria 

Tobacco

262%

Union Pacific

Railroad

245%

Caterpillar 

Industrial Equipment

214%

... the top five mid caps ...

Company

Industry

Dividend-Adjusted Return
 (Dec. 31, 1999 - Dec. 31, 2009)

EOG Resources 

Energy

1,061%

Occidental Petroeum

Energy

875%

Apache

Energy

588%

Kinder Morgan Energy Partners 

Energy

479%

Public Storage 

REIT-industrial

406%

... and the top five small caps.

Company

Industry

Dividend-Adjusted Return
(Dec. 31, 1999 - Dec. 31, 2009)

XTO Energy 

Energy

6,600%

Walter Energy 

Energy

2,975%

Holly 

Energy

1,787%

Precision Castparts 

Industrial Goods

1,628%

Alliance Resource Partners 

Materials

1,388%

All data provided by Capital IQ.

If you ever find yourself thinking that dividend-paying stocks can't possibly be growth stocks, remember these tables. This isn't an aberration, either. In fact, as a 2003 study by Robert Arnott and Clifford Asness showed, there's a link between higher dividend payouts and higher earnings growth. Why? One reason is that when company management teams are forced to dole out a portion of earnings each year as dividends, they have to be more deliberate in choosing value-creating projects and have less chance to "empire-build" with shareholder cash.

Time to reflect
Now that you know the best dividend stocks of the past decade, let's consider which ones might be the best in the next decade. If this exercise taught us anything, it's this: Start your search in out-of-favor industries, and then find those companies that have enough cash flow to fund their payouts for years to come.

Three of the worst-performing S&P sectors over the past five years have been financials, health care, and utilities, so let's start our search there. Here are a handful of stocks that have promising fundamentals, but are in out-of-favor industries:

Company

Industry

Dividend Yield

Return on Equity

T. Rowe Price Group (Nasdaq: TROW  )

Financials

2.1%

50%

Medtronic (NYSE: MDT  )

Health Care

2%

17.1%

IberiaBank (Nasdaq: IBKC  )

Financials

2.5%

15.9%

Exelon (NYSE: EXC  )

Utilities

5.3%

21.5%

Becton, Dickinson & Co. (NYSE: BDX  )

Health Care

2%

25.3%

AmTrust Financial Services (Nasdaq: AFSI  )

Financials

2.1%

22%

Piedmont Natural Gas (NYSE: PNY  )

Utilities

4.2%

16%

*Data provided by Capital IQ, as of May 21, 2010.

None of this is to say there isn't downside risk if the economy takes another turn for the worse, but if you want to have a chance of owning one of the best dividend stocks of the next decade, these out-of-favor industries are a good place to start.

If you'd like more help finding great dividend stocks, take a free 30-day trial of Motley Fool Income Investor, where over 75% of our recommendations are beating the S&P 500 and have an average yield of 4.7%.

To get started with your trial, click here.

Fool analyst Todd Wenning buys his athletic shoes from New Balance because it's the only domestic manufacturer still making shoes in the U.S. He owns shares of AmTrust Financial. Exelon is a Motley Fool Inside Value choice. Motley Fool Options has recommended a write puts position on Exelon. The Fool owns shares of and has written puts on AmTrust Financial Services and owns shares Medtronic. The Fool's disclosure policy is American-made.


Read/Post Comments (0) | Recommend This Article (14)

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.

Be the first one to comment on this article.

DocumentId: 1191037, ~/Articles/ArticleHandler.aspx, 8/1/2014 2:45:35 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement