3 Stocks That Are Automatic Wealth Machines

Suppose that, 30 years ago, you invested $1,000 in Altria, formerly Philip Morris, maker of the even-then-famous Marlboro brand of cigarettes.

When you invested that grand, you would have had just 29 shares at the price of $34.50. Hardly enough to get on with, right? Well, today, through splits and spinoffs, you would have:

  • 700 shares of Altria.
  • Nearly 500 shares of Kraft.
  • 700 shares of Philip Morris International.

Total value? About $72,600. Better yet, you'd have earned a total of $32,600 in dividends as a result of that original $1,000 investment.

What if you had reinvested those dividends? Instead of nearly 1,900 shares across three companies worth a total of $73,670, you'd have more than 7,400 shares of three companies worth a whopping $291,000. That includes more than $91,500 in dividend payments -- nearly three times the income received by those who chose not to reinvest dividends.

But here's the really sweet part. Today, without having to sell a single share, you'd be receiving more than $13,000 in income -- every year.

Now that's what I call a wealth machine.

Yeah, right!
All right, I know what you're thinking. "That is such a blatant example of data mining! Nobody did that!" Well, as it happens, my grandmother did. Not with Altria, but with ExxonMobil.

She bought shares of Exxon back in the early 1960s and reinvested her dividends. By the time my grandfather was ready to retire some 30 years later, they were able to buy two lots of land and build their retirement home on one of them -- paying cash on the barrelhead just from that one investment.

In other words, Altria is by no means the only example in which reinvesting dividends could have made you rich over the years.

Want further proof?

Professor Jeremy Siegel of the Wharton School of Business has shown that the 100 highest-yielding stocks of the S&P 500 outperformed the overall index by 3 percentage points per year. Now a 3-point advantage may not sound like much, but over 10 years, that meant more than $900 extra received for every $1,000 invested.

Wealth machines
Now before you can say, "Where am I going to find companies that even come close to what happened way back then?" let's look at what makes a "wealth machine."

I call Altria and ExxonMobil wealth machines not because they were great companies (although they were) or because they paid a dividend -- after all, not every dividend payer can be called a wealth machine -- but because they consistently raised their dividends. And they were able to do that because they performed consistently well.

What may surprise you is that research by Robert Arnott of Research Affiliates and Clifford Asness of AQR Capital Management has shown that companies with higher dividend payout ratios -- the amount of the dividend compared to net income -- tend to have higher real earnings growth in the following 10-year period. In other words, they're better-run companies. And we already know what earnings growth means for a company as far as price goes.

So that's what to look for: companies that consistently raise dividends over time. Now let's look at some numbers.

Would you believe me if I told you that over 20% of the companies currently in the S&P 500 have increased their dividend by 10% or more per year over the past 10 years? It's true. In fact, 91 companies have done so.

That list includes such familiar names as Lowe's (NYSE: LOW  ) , the home retailer. It raised its dividend an average of 26.9% over the past decade. Who knew that boring stuff like light switches and lumber could generate so much cash? Procter & Gamble (NYSE: PG  ) is also in the list. Not too surprising. The personal and household product company has been a reliable dividend payer for over 30 years.

And of course oil companies make the list, too. ConocoPhillips (NYSE: COP  ) and Anadarko Petroleum (NYSE: APC  ) have both raised their dividends by at least 12% per year on average for the last decade, returning cash to their shareholders.

Here are three other wealth machines -- and what you would have today if you had invested in them 10 years ago, reinvesting all dividends.

Company

Average Annual Dividend Increase

Result of Investing $1,000

CAGR, Including Dividends

Lockheed Martin (NYSE: LMT  )

16.4%

$2,680

10.4%

Nike (NYSE: NKE  )

16.2%

$4,610

16.5%

Occidental Petroleum (NYSE: OXY  )

11.0%

$10,550

26.6%

Source: Capital IQ, a division of Standard & Poor's. CAGR = compounded annual growth rate.

These average returns come close to rivaling Warren Buffett's performance -- and you don't even have to be as smart as he is. All you have to be is smart enough to invest in well-run companies with a history of paying dividends and increasing those payments over time.

If you'd like wealth machine stock ideas, enter your email in the box below to get "Motley Fool Top Picks & Perspectives 2011," a new free report with stock recommendations and portfolio guidance for the year ahead. We'll also tell you more about Million Dollar Portfolio, our real-money portfolio service that buys the best of our investing ideas, opening for the last time this year. To get started, just enter your email in the box below.

This article first appeared on March 27, 2010. It has been updated.

Fool analyst Jim Mueller owns shares of Philip Morris and Exxon, but no other company mentioned. Lowe's is a Motley Fool Inside Value selection. Nike is a Stock Advisor recommendation. Philip Morris is a Global Gains selection. Procter & Gamble is an Income Investor recommendation. The Fool owns shares of and has written covered calls on Procter & Gamble. The Fool owns shares of Altria Group, ExxonMobil, Lowe's, and Philip Morris. 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 is about investors writing for investors and making everybody richer.


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  • Report this Comment On November 12, 2010, at 1:23 PM, hodedofome wrote:

    Other good dividend growth stocks with a history of dividend increases (most of them paying 3% or more annually): TOT, RDS.A, ABT, COP, XOM, KMP, PAA, ETP, UGT, NNN, PNY, ATO, MCD, SNH, KFT, EXC, CLX, MHP, JNJ, PG, T, VOD, VZ, KO, PEP, K, KMB, SYY, UL, CINF, O, ADP, ED, RPM, NUE, GIS, HNZ

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