Turbocharge Your Returns With This Simple Strategy

This simple strategy can boost your investing returns with minimal effort.

May 5, 2014 at 1:04PM

Reinvesting your dividends is possibly one of the simplest ways to get rich with minimal effort.

In fact, the S&P 500 Total Return index currently stands at about 3,395 -- a full 80% higher than the standard S&P 500 index at current prices. On an annualized basis, the S&P 500 has returned 16.7% per annum during the past five years, while the S&P 500 Total Return index has returned 19%.

You don't need to be a hedge fund manager or billionaire to use this strategy. All you need to do is select a group of dependable dividend-paying stocks -- for example, ExxonMobil (NYSE:XOM), Altria (NYSE:MO), and American States Water (NYSE:AWR) -- sit back, and relax.

Bigger is not always better
In the world of dividend investing, the size of the payout is not the only consideration. Indeed, consider the high-yield mortgage real-estate investment trusts, or mREITs. Annaly Capital Management, for instance, currently offers a 10.6% dividend yield but has been forced to slash its payout three times during the past year.

On the other hand, both Exxon and Altria have steady dividend payout histories stretching back decades.

Low and stable
As the largest oil and gas company in the world, Exxon boasts unrivaled production. However, the company is not chasing growth like some of its peers; instead, the company is seeking stability to maintain its current level of output and safeguard investor returns.

Exxon has more projects coming on stream during 2014 than in any other year in its history. Yet these projects will only offset declining production from mature fields, as well as the loss of its oil concession in Abu Dhabi, which expired in January. As a result, Exxon's production is only expected to expand 3% from now until 2017.

As Exxon's production stabilizes during the next few years, it is reasonable to assume that the company's cash flow and shareholder returns will remain constant or grow in line with the price of oil.

At first glance, Exxon's dividend does not seem appealing, currently yielding 2.5% -- only slightly higher than the market average. However, Exxon is also buying back stock. In 2013, the company returned a total of $27 billion to investors via buybacks and dividends; on a per-share basis this works out to about $6.10 per share -- equivalent to a yield of 6.3%.

Dependable industry
A larger-than-average dividend yield, long payout history, and strong business are the three most desired factors in any dividend stock. Altria meets all of these criteria.

You may be doubtful about this choice, as Altria is a tobacco company. However, the company's payout history stretches back 43 years, and it currently offers a 4.8% dividend yield. Moreover, although the majority of Altria's income comes from cigarette sales, the company also has a smokeless division, wine estates, and a 27% stake in SABMiller. These three bolt-ons give the company some diversification.

Altria's total return since 1995 is north of 2,200% with dividends reinvested -- nearly 2,000% ahead of the S&P 500.

MO Total Return Price Chart

MO Total Return Price data by YCharts.

This long-term outperformance really gets me excited about Altria's future.

The longest of all
A final example is American States Water, a company with one of the longest dividend-payout histories that you can buy into today.

American States has been paying out and raising its dividend for 58 consecutive years. The company has managed to maintain this payout growth because it is highly cash-generative, reporting an operating margin of around 25% for fiscal 2013. This wide margin, combined with the company's low requirements for capital spending and position within a fairly defensive industry means that American States has been able to churn out investor returns for more than half a century now. 

Furthermore, American States has increased its dividend payout by 80% during the past 10 years; that's a compound annual growth rate of 6%, which is not spectacular but above inflation.

During this period, the company has only paid out an average of about 30% of its cash from operations in dividends. This has allowed the company to slowly increase its payout, building up trust with investors -- and it has plenty of headroom to keep raising its dividend for years to come, even if things turn against the company.

Foolish summary
Reinvesting dividends can be a great way to improve your investing performance, although care needs to be take when selecting dividend stocks. Altria, ExxonMobil, and American States all look to be great dividend picks due to their robust cash flows, payout histories, and conservative dividend payout ratios.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They 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.

Rupert Hargreaves owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information