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These Dividend Kings Are No Gamble

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Last night, I found myself fixated on a video poker machine in a Vegas casino. Though I live in Las Vegas, it's exceedingly rare that I put my money at risk at the casinos (unless we're talking horse racing, which is another story altogether). But when I have family or friends in town who want to try their hand at padding the bottom line for Las Vegas Sands or Station Casinos, I'm often willing to sacrifice a bit of my money.

In an unusual turn, the machines were loving me when I first sat down. Two four-of-a-kinds at Binion's quickly turned my $20 into $90, and after some back and forth, I cashed out $80. By the time I sat down again at Green Valley Ranch, though, Lady Luck had abandoned me and the entire $80 was quickly gobbled up.

By the numbers
While I'll readily admit disappointment, I wasn't one bit surprised at the outcome. Based on the way the payouts are set at most casinos, if you play perfect poker, then the machine will return around 97% to 99% of your money to you.

Now be careful, that doesn't mean that if you put $20 in that you'll end up with $19.60 (assuming 98% payback). It means that for each hand you play, the probability is that you'll get back 98%. For me, playing $1.25 per hand, that meant that I was losing, on average, at least $0.025 per hand. And, again, that's if I were playing perfect poker.

While that may not sound like much, if you're only moderately fast on the buttons, you can complete a hand in about five seconds, or 720 hands in an hour. That means that over the course of that hour the probabilities say that you will lose $18.

As anyone who's ever played a video poker machine can tell you, any given sitting may not work out that way, but the bottom line is that the machines are programmed to take your money. You will lose, that's the bottom line.

A better gamble
In light of the above type of gamble, it irks me when people refer to investing as gambling. Sure, biopharma companies such as MannKind and Arena Pharmaceuticals, whose future rides largely on the success or failure of a single drug, can often seem like true Vegas-style gambling, but what of more conservative flavors of investing?

I may have to give in and concede that it's all technically a gamble. After all, Merriam-Webster defines "gamble" as "an act having an element of risk." No matter how great the company is that you find or how fantastic the valuation, the future is unpredictable and so investors will also face some amount of risk.

However, thinking about the word "gamble" more colloquially, I'd argue that if you take a conservative, sober approach to investing, it's anything but a gamble.

Helloooooo, dividends
I've argued the wisdom of dividends nearly into the ground. And I'm A-OK with that, because if there is one thing that can help you make sure you're not gambling on your investments, dividends may be it. Just a few of the reasons I love dividends are:

  • Stability. You're not relying 100% on the whims of the market for your returns.
  • Restraint. Because management has committed to return cash to shareholders, they have to be choosey about their spending.
  • Respect. A dividend generally shows that management understands who really owns the company and should benefit from its profits.

Of course not all dividend payers are the same by any means. In fact, some dividend payers could still fall into the camp of Las Vegas gambles. So here are three things that I like to look for when tracking down reliable dividend payers:

  1. Track record. Dividend aristocrats are a special breed of dividend stock that have not only paid but increased their payout every year for at least 25 years. I'm not quite so stringent, but I do want to see a company that has been reliable about paying -- and not reducing -- its dividend for an extended period of time.
  1. Affordable payout. Real estate investment trusts and some other companies are required to pay out nearly all of their income in the form of dividends. While that doesn't necessarily make those stocks bad investments, I generally prefer companies with a moderate payout ratio -- that is, dividends that are markedly less than current profits.
  1. Great business. Any company is free to pay a dividend today whether or not its business has a future. I don't want to count on dividends from buggy-whip manufacturers or dial-up-modem experts.

What do companies look like that fit these criteria? They look a heck of a lot like these five companies.


Dividend Yield


Dividend Cuts in the Past Decade

Payout Ratio

Wal-Mart (NYSE: WMT  ) 2.7% Low-price retail None 28%
Procter & Gamble (NYSE: PG  ) 3.3% Branded consumer goods None 50%
UPS (NYSE: UPS  ) 2.8% Freight and logistics None 49%
Waste Management (NYSE: WM  ) 3.6% Trash collection None 64%
Sysco (NYSE: SYY  ) 3.3% Food distribution None 51%

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

Two of these stocks -- Wal-Mart and Sysco -- are part of my personal portfolio and the rest of them are on my radar to potentially be added at some point. The reason is simple: I have confidence that all of these businesses will be larger and more profitable 10 years from now, and between now and then they will all continue to share their profits through dividends.

Is there still an element of risk with these stocks? Absolutely. But I would hardly describe any of them as "a gamble."

That said, if you prefer to take more of a Vegas-style gambling route with your investing, I won't stop you. Nor will I get in your way if you want to feed your hard-earned money to video poker machines (it helps pay for Vegas-area schools). But if you want more cash returns and less dice rolling in your portfolio, consider companies like the ones above or these 13 high-yielding stocks that my fellow Fools have given their thumbs-up on.

The Motley Fool owns shares of United Parcel Service, Waste Management, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Waste Management, Sysco, Procter & Gamble, and Wal-Mart Stores. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. 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.

Fool contributor Matt Koppenheffer owns shares of Sysco and Wal-Mart, but does not have a financial interest in any of the other 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. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (11) | Recommend This Article (63)

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 July 12, 2011, at 10:33 PM, Joemit wrote:

    interesting take on some good companies. I am lucky? I have 3 of these, a large position in PF, and starting positions in SYY and UPS. I used to own WMT but sold it several years ago.

    I will have to put WM on my watch list....

  • Report this Comment On July 12, 2011, at 10:56 PM, TMFKopp wrote:


    Thanks for the comment!

    Re: WM

    Really like the company and would love to own it, but not quite sold on the current price ( Watchlist is definitely a good place for this stock as I think at the right price it's well worth owning.

    Here's an alternate take from Alyce Lomax, who's buying now:


  • Report this Comment On July 13, 2011, at 11:50 AM, GW1000 wrote:

    Hey Matt:

    I own shares of all five of these. We apparantly think the same. All of these have decent yields, have a long history of dividend increases and room to continue the increases well into the future. Some additional favorites of mine with similar charactaristics are Walgreens, Medtronic, Johnson & Johnson, Pepsico, Illinois tool Works, McDonalds, Meridian Bioscience, 3M, The Southern Company and Watsco. What do you think about these?

  • Report this Comment On July 13, 2011, at 12:15 PM, TMFKopp wrote:


    I like pretty much all of those (not all that familiar with Watsco and Meridian) and I own four of them.

    The current valuations are better on some than others, but it's a solid group overall. I like owning a portfolio that bores me so much that I'm completely disinterested in checking my tracking spreadsheet more than once/month.


  • Report this Comment On July 13, 2011, at 1:19 PM, dalemx wrote:

    Those now X -Canadian trusts like PVX PGH ENG still pay a good div.

  • Report this Comment On July 13, 2011, at 10:22 PM, PeakOilBill wrote:

    Many people can't live without any of them. One of the few times I can't be my usual cynical self. Not the highest yield, but high yield nearly always comes with some kind of risk. Interest rates spiking for instance.

  • Report this Comment On July 14, 2011, at 8:53 PM, BSolom wrote:

    in Nevada, if you're willing to spend a little time looking around and searching VP can find good pay-tables...that, if you've studied the basic strategy and/or used proper teaching software, will (long-term) give you positive results,when combined with comp benefits; a short while back, we found 10-7-5 double bonus at the Tuscany; 4-5 weeks ago we found 9-6 JOB at the LVHilton for $.50 up to $5.00 ... that's the gold standard when combined w/, it is with stocks; you've got to study 'em!!! great article; I really enjoyed it! I'm long SYY and WMT...also fond of optimal play videopoker! If you're gamblin' you may as well do it with knowledge!

  • Report this Comment On July 15, 2011, at 2:18 PM, TMFKopp wrote:


    I'm not going to encourage anyone to play video poker, though I will admit to know a few people that have played profitably over a long period of time -- but it's a GRIND. When I was at Binion's I had found a 9-5 JOB machine ($0.25), but settled for an 8-5 at GVR.

    I have to give credit to my sister for doing research on the payouts. I don't think most people have any idea what the diff payouts mean for them -- that's confirmed by the fact that I tend to glance around as I walk through casinos now and see people punching away at machines with ridiculously low payouts.


  • Report this Comment On July 15, 2011, at 10:30 PM, asdfk123 wrote:

    I have shares in Wal-Mart. Thanks for the suggestion on Waste Management. I'll add it to my watch list.

    Do you have any concerns about its payout ratio being kind of on the high-end?

  • Report this Comment On July 20, 2011, at 7:50 PM, lntwo wrote:

    Since we're talking about no-risk dividend plays I'm gonna throw out the VWELX and VWINX funds. They have proven to be rock solid, with a current yield of 2.6 and 3.5 respectively. Core holdings.

  • Report this Comment On July 29, 2011, at 8:06 AM, energysystems wrote:

    Intwo-Totally agree with VWELX and VWINX funds. Great track record, conservative but consistent. The only issue with VWELX is the 2/3rd of the portfolio that are bonds, with interest rates bound to go up in the near term, I think that will take a hit. Still though, a great fund. I also like VHDYX and VDIGX, although there is a lot of the same holdings, but one is good for a core holding.

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