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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.
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:
- 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.
- 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.
- 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 Cuts in the Past Decade
|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.