Are These Stocks the Best Investments You Can Possibly Make?

Despite what you may read in the headlines, picking stocks to find the "next big thing" usually doesn't work out well in the end. For every "it" stock like Tesla Motors, there are a dozen companies whose investors were hoping for a massive payday, but are instead finding the exact opposite.

Actually, most investors who end up with million-dollar portfolios earned them by smart, aggressive saving habits combined with steady, consistently growing stocks. And one of the best ways to do this is to buy a whole lot of what you may think of as "boring" stocks, but that in reality are quite the opposite.

Source: Flickr/401(k) 2013

The type of stocks you need
Basically, when investing for the long term, the best way to go about choosing your stocks is to put yourself in a defensive mind-set. In other words, you need to worry more about preventing losses than creating huge gains.

The best way to do this is choose stocks that pay dividends, and have an excellent history of raising those dividends. You'll also want stocks with low volatility, meaning they have less of a reaction to market moves than most stocks. Fortunately, these two concepts tend to go hand in hand.

For a good list of stocks that have raised their dividends for at least 10 consecutive years, check out this list. As you can see, there are quite a few to choose from. A good dividend tends to buoy a stock's price during tough times, since as the price drops, the yield rises and becomes more compelling, attracting buyers.

And to determine a stock's volatility, look for its "beta," which is included in virtually all of the major online stock quote providers. A beta of less than one means the stock has low volatility.

As an example, take a look at AT&T (NYSE: T  ) . The company pays an annual dividend of about 5.3% as of this writing, and it has increased the payout for nearly 30 consecutive years. The stock also has a beta of just 0.45, meaning that if the market drops or rises, AT&T's reaction should be just 45% as intense as the overall market's move.

Winning over the long run is all about the bad years
The most successful long-term investors are the ones who do better than everyone else when the market does poorly.

As Warren Buffett said to shareholders at Berkshire Hathaway's last annual meeting: "In up years, we'll underperform, we'll outperform in down years, and over any cycle, we'll outperform."

Basically, what this means is that good performance during bad years matters more to the big picture than beating the market during good years. To illustrate this, let's look at two investments, both with an equal starting value of $10,000, with one in an S&P index fund and one invested in the type of low-volatility defensive stocks we mentioned earlier.

Let's say that the S&P 500 goes down by 25% this year but rises by 30% next year, and that our low-volatility stocks went down by just 10% the first year and up by 15% the second year. Well, the investment in the index fund would now be worth $9,750. So, even though the second year's gains were stronger than the first year's losses, the investment would still lose money because of the devastating effect of really bad years.

But the defensive investment would be worth $10,350, even though it clearly underperformed during our hypothetical great year.

Not so boring anymore
As mentioned, sometimes these types of stocks are considered "boring," especially by inexperienced investors. After all, why invest in companies like Johnson & Johnson, Procter & Gamble, and ExxonMobil when you could buy more exciting companies like Tesla and Amazon.com?

Consider that over the past 20 years the S&P 500 has produced a total return (share price appreciation plus dividends) of about 470%, or about 9.2% on an annualized basis. Sounds pretty good, right?

Well, the "boring" stocks I just mentioned beat that return handily. Procter & Gamble, ExxonMobil, and Johnson & Johnson's total returns during the same time period were 830%, 997%, and 1047%, respectively.

XOM Total Return Price Chart

In other words, an investment in these stocks would have grown about twice as much as an investment in the S&P 500. Doesn't seem so boring anymore, right?

Some great dividend stocks to get you started
As we've seen, dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. We also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (12) | Recommend This Article (10)

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 September 01, 2014, at 8:38 PM, classic216 wrote:

    excellent points.

  • Report this Comment On September 01, 2014, at 8:52 PM, RCWIII wrote:

    As a retired Series 7 & 67 Financial Adviser who returned to his roots in the investment quality Fine Art, Antiques and Collectibles business in retirement, I was just asked to run some numbers for some clients interested in a Rare Sapphire coming up at auction - and the published records were eye opening... (All of these have been adjusted for inflation over the years listed.)

    (1) A 1938 First Issue Superman Comic, sold last week for the benefit of The Christopher Reeve Foundation (which boosted its result a bit) generated an average annual ROI of over 30% for those 76 years...

    (2) Another nearly identical 1938 First Issue Superman Comic, sold last year generated an average annual ROI of over 20% for those 75 years...

    (3) The 1962 Ferarri that sold for a "Net" of over $40 Million to the seller last week generated an average annual ROI of over 10.3% for those 52 years...

    (4) The average item sold at Sotheby's and Christie's generated an average annual ROI of over 9.75% over those same 52 years...

    (5) The average American home generated an average annual ROI of over 2.3% over those same 52 years... (The Capital Gain Tax Benefits of owning a home would have boosted that figure a bit for most home owners.)

    (6) The Dow Jones generated an average annual ROI of over 2.1% over those same 52 years...

    Now here are the scary ones...

    (7) The Dow Jones generated an average annual ROI of over 0.5% since 1999... (0.9% since 2007)

    (8) The S&P LOST 0.6% a year against inflation since 1999

  • Report this Comment On September 01, 2014, at 9:04 PM, notyouagain wrote:

    Oh, gee! That's it! Instead of enrolling in that direct stock purchase plan for VZ that charges almost nothing for purchase transactions and reinvesting dividends, I should save up for a million dollar comic book!

    I WONDER WHY I NEVER THOUGHT OF THAT???

  • Report this Comment On September 01, 2014, at 9:13 PM, rainmon wrote:

    The best investment you can make is in yourself, by working for a good company with good matching 401K benefits or work for the government or military and retire after 25 years with a life long guaranteed pension. When you work in the military (if you don't get killed) you can get free or cheap housing and save a lot of money that way too. I have a friend here in Thailand that is only 52 retired military, has a nice condo, no money worries, travels as much as he wants back to America, and all over Asia, goes fishing all the time and really enjoys his life. He hates the stock market and refuses to invest in it after losing money once. Me, I worked in the private sector had my own business for most of my career and saved a lot but now with a bad back condition and losing in the market big in 2012 and a lot of medical bills I am running out of money and can't work. I have no choice am forced to risk whats left of my savings in the bond and equity markets. I have tired to build a crash resistant portfolio (not crash proof) and buy a few Fidelity free ETF's (a small % of my savings) mainly in utilities and telecom (no transaction fee sector ETF's) and PONDX bond fund, PFF preferred shares ETF and EMD Emerg Markets Bond, plus some Thai mutual funds and almost half in cash. I am slowing putting the rest of my money in PFF and the Fidelity utilities fund FUTY. Maybe some into the Fidelity tech fund FTEC.

  • Report this Comment On September 01, 2014, at 9:24 PM, rainmon wrote:

    and BTW ... Fidelity's sector ETFs offer the lowest expense ratio in the industry 0.12%.of fund assets used to pay for operating expenses and management fees, ... and you can buy 70 different iShare ETFs commission free there as well...

  • Report this Comment On September 01, 2014, at 9:26 PM, rainmon wrote:

    @notyouagain good point LOL! and if I would have bought a condo in London 15 years ago I would be a multimillionaire.

  • Report this Comment On September 01, 2014, at 10:14 PM, pauldeba wrote:

    I am calling BS on those "scary returns".

    1) as usual you picked market peaks in 1962 and 1999 after big runups as your base, no one is fooled by that

    The Broncos outscored the Seahawks 8-7 in the final 17 minutes of last year's Super Bowl, as well

    2) you gave the return of 1 item of a large class of assets. The rest returned -100% over that period

    3) beating inflation is the key, not beating inflation by 10 percentage points. It is absurd to think a broad market of humongouse companies can beat inflation by double digits for 50 years. That would mean our economy is growing double digits for 50 years, absolutely absurd.

    Your dumb advice seems to be figure out what illiquid collector piece will be worth a lot in 50 years and buy it. Absolutely, the stupidest advice I've ever seen on here, basically.

  • Report this Comment On September 01, 2014, at 10:52 PM, MfromG wrote:

    Great post Paul. I'd give you a "Like" if I could.

  • Report this Comment On September 01, 2014, at 10:53 PM, notyouagain wrote:

    Hey! How many of you would have this guy for a "financial advisor"?

    I'm betting he was some guy that peddled mutual funds at best.

  • Report this Comment On September 01, 2014, at 10:54 PM, notyouagain wrote:

    I'll second that! Good post, Paul!

  • Report this Comment On September 01, 2014, at 11:11 PM, notyouagain wrote:

    And I hadn't noticed he picked 1999...yeah, sure, 1999. When idiots chased stocks up to absolutely insane values and mutual funds, inundated with gobs of money pouring in from a public that thought it could go up forever, chased even wonderful companies up so high they were terrible investments...

    Coke (KO) went to about 70 times earnings at one point, which caused its dividend yield to bottom out at 0.7%.

    When the earnings multiple goes that high and the dividend yield goes that low, sensible people that buy individual stocks look for higher yields and lower multiples.

    And people that simple-mindedly invest in "the market" by continuing to pour money in to mutual funds that then have no choice but to keep pouring more money into already-overpriced stocks get screwed.

    After all, with billions of dollars they had to invest, they couldn't invest in anything but large caps without ending up owning the companies. And all the best large cap companies had been driven to insane prices already... till the bubble popped.

  • Report this Comment On September 05, 2014, at 12:17 PM, 407rotorhead wrote:

    I think it's ironic that Berkshire doesn't pay a dividend, but is always referred to in this dividend forum.

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