I learned about investing from my mother, though that's not something she's acutely aware of. We have always been a hardworking middle-class family. Mom's a hairdresser. Dad's a school teacher. Money got tight during summers sometimes when we didn't have our full income.
But I was the saver in the family. Every time the grandparents slapped $10 on me for my birthday or gave me the change they accumulated on their coffee table, I put it away in this little, battleship-gray metal box that I hid in a cabinet in my bedroom. Of course, my hiding place wasn't particularly good because one day I found my mother raiding my cash to pay for a pizza we'd just ordered for dinner.
"Don't worry," she said. "You'll get it back -- with interest."
And so began my cutthroat entrepreneurialism at the age of 10. Oh, I milked it. At one point, I probably had a few hundred bucks saved up in that little metal box and I'd loan it out to my mother at 6%, not a penny less. I made her pay me back a portion of the interest every week so I had enough cash flow to pay for my baseball cards, Blow-Pops, and Mad magazine. It was a good arrangement.
In fact, with money market accounts paying about half a percent these days, I look back on it longingly now.
Why dividends win
My problem, of course, has been that I always looked at income as something you got from CDs, money markets, or plain-vanilla savings accounts. When I started investing in stocks, I nearly disregarded dividends altogether, favoring companies that paid out no or minuscule dividends such as Microsoft (Nasdaq: MSFT ) , Intel (Nasdaq: INTC ) , Cisco (Nasdaq: CSCO ) , Time Warner (NYSE: AOL ) , and Starbucks (Nasdaq: SBUX ) .
As fortune would have it, I missed much of the tech train wreck because I sold off most of my holdings to buy a house. But the bear market and unethical morass that many of our corporate leaders have fallen into in recent years have really brought me back to looking for cold, hard cash. Show me the money. Because once I have it in my pocket, no insider trading or accounting scandal can take it away from me. There's no accounting trick that can fake cash payouts. Plus, dividends require companies to use their cash more efficiently and prevent them from investing in projects with diminishing returns.
Finally, while I like to see a lot of cash on the balance sheet -- because things can go wrong -- does any company really need its coffers filled with $50 billion? Are you listening, Microsoft? Berkshire Hathaway (NYSE: BRKA ) ? Give me cash and let me decide what to do with it -- reinvest it in more shares or blow it on yet more blues CDs and concert tickets.
According to Standard & Poor's, dividends accounted for 42% of the S&P 500's total return since 1926. Further, dividend payers contributed much less to overall market volatility than their stingier counterparts. Without dividends, the S&P returned on average only 6.3% annually. With dividends? It returned 10.2% -- the steady historical return against which we all should measure our portfolios.
Finding the best payouts
But how do you find the best dividend-paying companies -- ones that are not resting on their laurels (or worse, dying) but are actually growing and appreciating in value? I have to admit to being completely outside my realm of competence here -- OK, and that's not saying much. Fool analysts have done excellent work for years on dividend reinvestment plans, largely as part of the Fool's old Drip Portfolio. But at its core, Drip was a growth strategy, pursued in a cost-effective way. It wasn't until Mathew Emmert (TMF Gambit) arrived on the scene a little more than a year ago that Fool.com really had someone seeking income as a primary source of investment returns.
Mathew approaches dividend-paying stocks and other high-income-producing investments with a passion I have never seen before. In fact, for the first few months, I thought his devotion to them bordered on insanity. Now, I see it's simply an obsession, and his obsession can be a good one for you and me, as he has demonstrated via market-beating returns in the Motley Fool Income Investor newsletter.
Mathew's the first person I've met who says I can make 7% in cash off an investment. In fact, after I asked him to put his money where his mouth is, he came up with 7 Paying 7 -- a free report you can get right now along with a free one-month trial to the newsletter. And if you keep your subscription beyond the first month and the newsletter doesn't help you make money, or you just decide you don't like Mathew's impish looks, we'll give you a refund.
Dividends plus growth
Regardless, what I've learned from Mathew's work on Fool.com and in the newsletter is that you can have your cake and eat it, too. You can find investments with high yields that will also offer you capital appreciation. My favorite pick of Mathew's so far is RPM International (NYSE: RPM ) , which he recommended in his six-pack of dividend payers when it was paying a 5.65% dividend yield.
Since then, the stock is up 120%. Now if that isn't the best of all worlds, I don't know what is. RPM is the maker of Rust-Oleum, a product I have used often but never even considered investing in. I never would have thought to even look at the company if it weren't for Mathew's incessant yapping about it here at Fool HQ.
Those are the types of opportunities I expect him to unfold for us in Motley Fool Income Investor. If you like getting paid to invest, it's something you might want to check out.
This commentary was originally published on Aug. 23, 2003. It has been updated.
Bob Bobala's mother still pays him $3.64 per week in interest, which he is saving up for some fat dividend-paying stocks for her retirement. The Motley Fool is investors writing for investors.