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"Those who cannot remember the past are condemned to repeat it."

That George Santayana quote was always a little pessimistic for me. As investors, it certainly behooves us to study the past, figuring out what didn't work and how we can avoid it. But I think we're also well-served by looking at what did work, and figuring out how we can repeat that.

With that in mind, I was making the most of CNNMoney's great trove of past Fortune 500 data to examine the returns of some of the largest companies (based on profits) of decades past. Here's what I found.

In 1981…



Dividend Adjusted Return 1/1/1981 to 5/16/2011

Compounded Annual Returns

ExxonMobil $5.7 billion 5,520% 14.1%
IBM $3.6 billion 1,920% 10.4%
Mobil $3.3 billion 410%* 9%*
Texaco $2.6 billion 911%** 11.8%**
Chevron $2.4 billion 2,850% 11.7%

Source: CNNMoney and Capital IQ, a Standard & Poor's Company.
*Returns through the 1999 merger with Exxon.
**Returns through the 2001 merger with Chevron.

For sake of comparison, I pulled up returns for the S&P 500 since 1981 and came up with 875%, or a 7.8% annualized return. Every one of the hulking companies above trounced the S&P's returns.

In 1991…



Dividend Adjusted Return 1/1/1991 to 5/16/2011

Compounded Annual Returns

IBM $6 billion 736% 10.9%
ExxonMobil $5 billion 1,030% 12.6%
General Electric (NYSE: GE  ) $4.3 billion 617% 10.1%
Altria (NYSE: MO  ) $3.5 billion 1,920% 15.8%
Dupont $2.3 billion 471% 8.9%

Source: CNNMoney and Capital IQ, a Standard & Poor's Company.

For this period, the S&P 500 returned 307% or 7.1% per year, once again well short of what the top profiteers of the Fortune 500 delivered.

A curious result
The result made little sense. These were some of the biggest companies in existence in both of these periods. How could they all have beaten the S&P 500 so badly? After all, they were key components of that index!

After spending an admittedly embarrassing amount of time pondering this, the truth hit me like a ton of bricks. I was comparing the dividend-adjusted returns of these stocks to the simple price change for the S&P 500.

Though you rarely hear people talk about "S&P 500 total returns," it's an important distinction, because there's a big returns difference when you factor in those quarterly kickbacks. Unfortunately, the data available on the S&P's total returns is pretty spotty.

Using Vanguard's S&P 500 index fund (which goes back to 1987) as a proxy, I was, however, able to find that its total return since 1991 has been 505%. Though it still falls short of four of the five companies in the table above, that number makes a lot more sense.

A big difference
I don't need reminders about why dividends are important -- I already know they're a very important component of investment returns. But I don't mind an extra reminder.

But there's been trouble in paradise for dividend investors -- particularly those who like the ease of index funds.

As my altogether unnecessary red arrow points out, dividends from the S&P 500 have been like a contestant on The Biggest Loser -- they're getting mighty slim. And with dividends playing such a big part in historical returns, this is very bad news for investors.

You can go your own way
Happily, we don't have to simply take the S&P's yield and whimper, "Thank you, sir! May I have another?" Instead, we can venture beyond the safety of the index to build a portfolio of stocks with yields worth having.

Now, I know that some readers will disagree with me on this, but I don't think it's ideal to simply grab the biggest yields available. I want to look back 30 years from now at the massive long-term returns that I've racked up. In addition to worthwhile yields, I want quality companies that I can expect to be around 30 years from now.

With that in mind, here are five stocks that I think fit the bill. All five have dividend yields well in excess of the S&P's, trade at reasonable valuations, and sport impressive Buffett ratios. I believe that all of these businesses have what it takes to continue to succeed for decades to come.


Dividend Yield

Forward Price-to-Earnings Ratio

Buffett Ratio

Johnson & Johnson (NYSE: JNJ  ) 3.4% 13.5 30.9%
McDonald's (NYSE: MCD  ) 3% 15.7 22.2%
Kimberly-Clark (NYSE: KMB  ) 4.1% 13.8 21.5%
Sysco (NYSE: SYY  ) 3.3% 15.6 23.6%
Mattel (NYSE: MAT  ) 3.5% 12.5 27.7%

Source: Capital IQ, a Standard & Poor's company.

The stocks above aren't idle musings -- on four of the five, I've got my money where my mouth is, and they're all currently in my portfolio. Kimberly-Clark is the only one that isn't, and frankly, I'm not sure why I haven't added it yet.

In these times of payout drought, stock like those above will give your portfolio the dividends it so desperately needs to grow. And if five ideas aren't enough for you, my fellow Fools have put together a special report outlining "13 High-Yielding Stocks to Buy Today." And you can get a free copy by clicking here.

Motley Fool newsletter services have recommended Johnson & Johnson, Kimberly-Clark, Sysco, McDonald's, and Chevron. The Motley Fool owns shares of Johnson & Johnson, International Business Machines, and Altria Group. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Chevron, Johnson & Johnson, Mattel, McDonald's, and Sysco, but does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (18) | Recommend This Article (84)

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 May 17, 2011, at 5:21 PM, goalie37 wrote:

    Another bonus of the listed companies is the growth of the dividends over long periods of time. 3% on Mcdonald's will be much more a decade or two from now.

  • Report this Comment On May 17, 2011, at 6:52 PM, TMFKopp wrote:


    Ab-so-lutely! Great point.


  • Report this Comment On May 18, 2011, at 11:11 AM, dontwin wrote:

    Don't understand recommending 3-4 % dividends when you can get 6% from companies like Verizon and Duke. Or take a little chance and get 7% fro, sdrl and pdr.

  • Report this Comment On May 18, 2011, at 11:59 AM, rushil99 wrote:

    Oi dontwin, look at the buffet ratio and these provide reliable dividend yield. Stop being so arrogant.

  • Report this Comment On May 18, 2011, at 12:00 PM, rushil99 wrote:

    and the MF know more then you!

  • Report this Comment On May 18, 2011, at 12:22 PM, mikecart1 wrote:

    rushil99 you are the one that is arrogant. I have crushed the best of the best on TMF staff the past 3+ years in returns. I will continue to do so!

  • Report this Comment On May 18, 2011, at 12:43 PM, ytm wrote:

    "These were some of the biggest companies in existence in both of these periods. How could they all have beaten the S&P 500 so badly?"


    I will tell you how. IBM, Exxon, GE, Altria, and Dupont all had multiple stock splits each during the time period you are referencing. The compounding effect of these stock splits is what caused these massive rates of returns.

    But this was the past. I can assure you going forward, you will not see large companies like these splitting their stock two or three times in a 10 year period like the 80's & 90's when their proverbial stock floats were much smaller than at the present moment.

    This drastically changes the landscape. Take Microsoft for instance. Pays out a consistent annual dividend. Its last stock split was over 8 years ago and its actual stock price has been completely flat now for nearly a 10 year period. So at best your annual rate of return would be flat as to whatever the dividend rate has been, 1% or 2% depending on when you bought in. And if you bought in during 1999 or 2000, you are most likely still underwater on that position now 11 years later.

    IMHO given the new paradigm we are facing in investing, if you really want to focus on dividends as a chunk of your portfolio in a specific company, you should really check out their fixed income corporate notes first. Much much more principle stability, with a superior and more predicable annual rate of return.

  • Report this Comment On May 18, 2011, at 2:00 PM, TMFKopp wrote:




    As I noted in the article, my preference is towards companies that I can see holding for decades. This is much easier with a company that has a rock solid competitive advantage. While there are drillers that are better positioned than others, to a large extent it's a commoditized business.

    With Duke, it's a matter of the returns and capital efficiency. Its Buffett ratio (which is similar to return on capital) is closer to 5% -- not surprising for a utility. I don't think there's anything wrong with buying utilities, particularly for their fat yields, but it wouldn't be among my very first choices.

    Verizon is a good one. I own AT&T myself and almost included one of the two on the list because of the attractive yields. However, the future outlook (decades, that is) is a bit cloudier than the ones I've listed.

    Also, as goalie37 pointed out, though these aren't monster yields, these companies have plenty of room to continue growing their payouts.


  • Report this Comment On May 18, 2011, at 2:05 PM, TMFKopp wrote:


    "I will tell you how. IBM, Exxon, GE, Altria, and Dupont all had multiple stock splits each during the time period you are referencing. The compounding effect of these stock splits is what caused these massive rates of returns."

    Sorry, but this is 100% incorrect. Stock splits are purely optical. When a company splits its stock, each share becomes two, but it's twice the shares sharing the exact same amount of profit. So if the company's earnings per share were $1.00 prior, they drop to $0.50.

    Think about it this way: If I buy a pizza, I get the whole thing. If you come along and I decide to split it with you, we cut it in half. If two more people come along and we all decide to split it, then we cut the halves in half. There are now four shares of pizza, but it's all still the same pie that we started with -- nothing more, nothing less.

    And so it goes with share splits.


  • Report this Comment On May 18, 2011, at 2:25 PM, ytm wrote:


    I did not realize your time horizon for the strategy, so with that said I re-read your article and it is very logical for this methodology to be on the equity side. And this is compliment for you, coming from someone who stays on the debt side.

    As far as your pizza analogy goes, of course I realize that. I guess if what you are insinuating is that if, for instance, Exxon Mobil did not have three stock splits between 1987 - 2001, the stock price would have pulled a Google or Berkshire like move that is understandable.

    My point was merely this. That if you had 500 shares of Exxon Mobil in 1986. By 2001 you now had 4000 shares, holding through three 2-1 stock splits.

    As opposed to just holding 500 shares of a random company for 15 years that went side ways or tanked at some point during this period. It would be a completely different outcome, as with Microsoft for the last 11 years.

    Thanks for your reply.


  • Report this Comment On May 18, 2011, at 3:07 PM, TMFKopp wrote:


    So here's the way to think about it...

    When your 500 Exxon shares turn into 4,000 shares the per-share profits that you're getting are chopped by a factor of 8. And since splitting shares doesn't impact a company's ability to make profits, the bottom line should be the same in either case.

    So let's say that at the beginning of the period, when you have 500 shares, Exxon is earning $1 per share (note: I'm making the profit numbers up).

    Now let's say that Exxon tripled profits between 1986 and 2001. If you still have the same 500 shares (no stock splits), then you're getting $3 in profits for every share. If, however, the company did do all of the splitting, you're now getting roughly $0.38 in profit for every share.

    Since we're talking about one company here, there should be no difference in the P/E multiple that investors apply to Exxon's profits under either scenario. Let's say that multiple is 10.

    In scenario 1 (no splits), the stock would be worth $30 per share. In scenario 2 (splits) it would be worth $3.75.

    But how much is your stake worth? In scenario 1 ($30 * 500) it's $15,000. And in scenario 2 ($3.75 * 4,000) it's ... $15,000. The value is created by the company's profit growth (and potentially changes in valuation multiples), not the number of shares that are outstanding (unless we're talking about stock sales or repurchase, but that's another story).

    Many individual investors like stock splits because they keep the stock price low. But -- particularly over the long term -- stock splits shouldn't have any real impact on the value of an investment.


  • Report this Comment On May 18, 2011, at 5:34 PM, midnightmoney wrote:

    This is according to yahoo Finance:

    Mattel's stock price in April 1996 was $26.02.

    Mattel's stock price in May 2011 is $26.84.

    You'd have made about 5.5 cents per year on that investment + dividends. Is there something going on at the company to push the stock higher from here, or is this a company where you just kind of park your money for a while? Or (more likely) am I missing something?

  • Report this Comment On May 18, 2011, at 5:54 PM, TMFKopp wrote:


    Thanks for the comment.

    First, I'd point out that your example highlights the importance of dividends -- while the stock price barely budged, adjusted for dividends, MAT's stock returned 47% over that period. But your point still stands since that's not a terribly great return over a 15-year period.

    Note too that the company's profit grew 82% between 1996 and the past 12 months.

    But of course, I'm recommending (and own) MAT of today, not that of 1996. In 1996, the stock had a price-to-earnings ratio (trailing) of more than 22. Today, it's 14.5. In 1996, the company had a minuscule, sub-1% dividend yield. Today the yield is 3.5%.


  • Report this Comment On May 18, 2011, at 6:07 PM, midnightmoney wrote:

    gotcha and I'm with you. When I saw your recommendation I went all up and down the company looking for stuff that stood out. I usually go back and look at the last two splits to see how it behaves, if they split it at a particular number and therefore how fast it grew between them, etc. I thought, how could I have missed this mattel for so long, but then I saw that the price had kinda stagnated, so I thought I'd write. Nonetheless, this is just the kind of company I'm looking for as well. Trying to rebalance my portfolio at the moment. For what it's worth, I've just picked up afsi, intel, and am gravitating toward mkcormic--all stocks I'll hope to hold long term as well. Thanks for the post back.

  • Report this Comment On May 18, 2011, at 6:37 PM, TMFKopp wrote:


    Sure thing!


  • Report this Comment On May 20, 2011, at 12:54 PM, alan0101 wrote:

    NLY check it out

  • Report this Comment On May 20, 2011, at 3:10 PM, drborst wrote:


    One specific question regarding the "Ouch" arrow in your S&P500 dividend graph. (looking at the graph got me curious)

    How does the dividend yield compare to some other interest rates (bond yields, morgage rates)?


  • Report this Comment On May 21, 2011, at 1:24 PM, RockyTopBob wrote:

    These are all great companies and the dividends will be sustained. Makes me wonder why TMF SA recommends Berkshire over these. BRK doesn't pay a dividend.


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