The One Thing You Must Know About Dividend Stocks

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Today, we feature an interview with James Early, the advisor for Motley Fool Income Investor, about the power of dividend investing.

Mac Greer: Let's talk about the relative merits of investing in dividend stocks versus investing for capital appreciation.  You're always flapping your gums about the virtues of dividend stocks. But in the last couple of years, shareholders have made big money off non-dividend payers like Apple, Baidu, and Chipotle.  Aren't you like the little old lady who plays the nickel slots all day when the real money is in blackjack or craps?

James Early: Here's the deal. The dividend stock will never be the biggest winner in the room. It won't make headlines. But the dividend table has the best odds. Study after study has confirmed that. For instance -- and don't get me started here -- Ned Davis Research found that from 1972 to 2006, non-dividend stocks in the S&P 500 returned just 4% annually, while dividend payers returned 10% annually. Sure, the biggest winners came from the non-dividend group, but the odds of finding them in advance are very low. I'll rub elbows with old ladies all day long if I'm making money (and friends) in the process.

Greer: OK, so maybe the nickel slots was a bad analogy. My quick research shows that the house has around a 15% advantage with nickel slots, compared to only a 0.20% advantage with single-deck blackjack. So maybe dividend investors are rubbing elbows at the blackjack table instead. If I'm an aspiring dividend investor, where should I start?

Early: I'd say your advantage is even better. In fact, a monkey throwing darts at dividend stocks may be able to beat the S&P average. Which doesn't make me feel good about beating the S&P by 9.2 percentage points at Income Investor, but anyway ... One way to start is by finding a few stable dividend companies that you'd like to own even without the yield. A rookie mistake is to sort stocks by yield and just buy the highest. Often, yields above 9% come from companies on shaky ground -- the stocks have been hammered, making the dividends look high in comparison. It's best to start with safe companies and then build out. From my newsletter, I like power company Dominion Resources (NYSE: DOM  ) and toilet paper company Kimberly-Clark (NYSE: KMB  ) , both of which yield above 4%.

Greer: Ah, Kimberly-Clark. You sang its praises on a recent Motley Fool Money Radio Show and asked the probing question: Who's going to use less toilet paper in a recession? (We'll let that remain rhetorical.) So what are some other consumer-friendly, recession-resilient dividend stocks?

Early: McCormick (NYSE: MKC  ) absolutely dominates the spice aisle in your local grocery store -- in both brand-name spices and generics. It yields 2.6%. I also like Wal-Mart (NYSE: WMT  ) as a recession performer. If any company could take over the world, it would be Wal-Mart. It yields 2.4%. Finally, against every healthy bone in my body, I'll toss out McDonald's (NYSE: MCD  ) . It's a big dividend stock now, yielding 3%.

Greer: McDonald's is a machine. I'm still kicking myself for not buying shares a few years ago when the stock was trading a lot lower (in the wake of Morgan Spurlock's film/hatchet job Super Size Me). And speaking of McCormick spices, did you know that you can use its cinnamon spice to deter ants? I learned that from a Motley Fool interview with McCormick CEO Bob Lawless a few years ago.  

Early: I tried that, and it failed miserably. The ants were walking all over the cinnamon, and even coming to check it out. My wife made fun of me. I wasn't using McCormick cinnamon, so maybe that was the problem.

Greer: Ants, collectively, are pretty darn smart and discerning. That will teach you to use cinnamon from any company that doesn't pay a dividend.

Want to read more? James things one oil stock could produce gushing returns and he thinks it's time for Apple to start paying up.

Wal-Mart is a Motley Fool Inside Value pick. Baidu and Chipotle are Motley Fool Rule Breakers recommendations. Apple is a Motley Fool Stock Advisor choice. Chipotle is a Motley Fool Hidden Gems pick. Kimberly-Clark and McCormick are Motley Fool Income Investor picks. The Fool owns shares of Chipotle and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (9)

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 August 29, 2010, at 3:42 AM, thomfahr wrote:

    Highest dividend yielding stocks top 250:

  • Report this Comment On August 30, 2010, at 6:00 PM, mizzoushark wrote:

    James -

    McD's has been offering healthier choices in the last few years ,,, premium coffee that may not be quite as good as SBUX, but comes at half the price ... smoothies that may not be quite as good as the smoothie shop's, but at half the price ... salads (you don't HAVE to get the deep fried chicken on it, seriously), yoghert .... Besides who else in the fast food industry has an executive chef trained at the Culinary Institute of America coming up with new offerings!!!!!.

    Oh - and the dividend of almost 3% doesn't hurt my feelings either. :)


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