The Startling Truth About Dividend Stocks

The startling truth about dividend stocks is this: Their performance destroys that of their nondividend-paying brethren. It's as simple as that. In two paragraphs, I'll prove this to you, and then conclude with three dividend stocks you can use to start profiting from this lucrative reality.

Proof that dividend stocks dominate
Let's start with a look at the most recent year. As of today, the S&P 500 ETF (NYSE: SPY  ) , an exchange-traded fund that tracks the performance of the S&P 500, returned 2.6% over the past 52 weeks. The SPDR S&P Dividend ETF (NYSE: SDY  ) , an exchange-traded fund that tracks the performance of S&P's Dividend Aristocrats, returned 7.8% over the same time period, a full 5.2 percentage points better. Moreover, the latter ETF emphasizes some of the oldest and most established (i.e., boring) corporations in America such as Procter & Gamble, Coca-Cola, and McDonald's -- certainly not what you'd think of as highfliers.

To ensure this recent performance isn't a fluke, let's follow Fool analyst Morgan Housel's lead and look further back in time. According to Morgan's calculations, $1,000 invested in the S&P 500 in 1957 was worth $176,000 in 2006. The same $1,000 invested in the top 10 S&P companies with the highest dividend yields grew to $1.3 million. In other words, you would have made more than seven times the amount by choosing dividend stocks over the broader market. Even more counterintuitive was Morgan's demonstration that stocks with the highest dividend payout also have the highest average P/E ratio. Indeed, famed Wharton finance professor Jeremy Siegel goes so far as to say: "It's black and white; stocks with higher dividend yields have given better total returns with actually lower risk for the shareholders."

Drink the dividend Kool-Aid
As the preceding paragraphs demonstrate, there's simply no argument that dividend stocks aren't on average the best place to stash your extra cash. So where should you start? My recommendation is to build a dividend beachhead with tobacco companies Lorillard (NYSE: LO  ) , Reynolds American (NYSE: RAI  ) , and Altria Group (NYSE: MO  ) . They all have dividend yields of 4.5% or more, captive customers, and strong brand recognition. They also happen to have a history of producing strong share price appreciation. Last year, for instance, the three posted total returns of 46%, 34%, and 28%, respectively.

For more ideas on great dividend stocks, check our free report about 11 rock-solid dividend stocks that investors can use to shore up their future with fat quarterly dividend checks. To get your free copy while it's still available, click here now.

Fool contributor John Maxfield has no financial position in any of the securities mentioned in this article. The Motley Fool owns shares of Altria Group and has sold shares of SPDR S&P 500 short. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.


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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 January 06, 2012, at 1:45 PM, galiette wrote:

    I find it disappointing that this article touts tobacco stocks. There are many dividend stocks which have been recommended by the Fool website before, which have high rates of return. It's disappointing that you promote an industry which sells a product known to cause cancer.

  • Report this Comment On January 07, 2012, at 1:01 PM, Merton123 wrote:

    Galiette is giving Motley Fools an opportunity to provide value to investors who want to be socially conscious in their investing. There are a few mutual funds out there that cater to people like galiette who wants to make money but also wants to be socially responsible. There is an entire group of people who have adopted vegetarian lifestyles, recycle their garbage, and want to extend their value system to their investing. Does that make Galiette a bad person? I don't think so. I support you galiette and applaud your social consciousness.

  • Report this Comment On January 08, 2012, at 8:01 AM, JeanDavid wrote:

    I would not presume to tell others what stocks to buy or avoid. But I will not buy tobacco companies, and I would not buy private prison and rent-a-cop companies either. I have stopped owning pharmaceutical companies and petroleum mining companies too. This policy of mine costs me money, but it helps me sleep and night and I can look at myself in the mirror in the morning. And that is worth more than money to me. YMMV, of course.

  • Report this Comment On January 09, 2012, at 7:58 AM, RavenManiac1968 wrote:

    My Father, Grandfather, and Grandmother all died due to smoking cigarettes. I simply can't bring mself to invest my money in tobacco companies.

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