Supercharge Your Income With These Stocks

It's no secret that dividend-paying stocks are an essential part of any retirement portfolio. According to the Investment Company Institute, for example, more than half of investors over the age of 65 invest primarily for income. IRS data reveals that 59% of 2004 tax returns with qualified dividends came from investors aged 50 and up.

But all too often, investors believe that dividend-paying stocks are best-suited for people already in retirement. The same IRS data showed that only 15% of returns with qualified dividends came from investors under the age of 35 -- and that's a shame.

Dividend-paying stocks really show their merit with two things: time and reinvestment. And that means that only investors with lengthy time horizons can really take advantage of them to supercharge their retirements.

Talk about some extra scratch!
Consider a modest $1,000 investment in Johnson & Johnson (NYSE: JNJ  ) back in July 1980. A year later, the investment would have been up 35% and paid another $50 in dividends. Holding on for the long run, however, would have returned quite a bit more:

Original Number of Shares

Shares Today

Value Today

Total Return

Annual Dividends Today






Source: Johnson & Johnson Investor Relations, as of Aug. 29, 2008.

But with reinvested dividends -- which only those investors who have other sources of income, like a salary, can do -- the returns are substantially better even than that:

Original Number of Shares

Shares Today

Value Today

Total Return

Annual Dividends Today






Source: Johnson & Johnson Investor Relations, as of Aug. 29, 2008

You didn't have to be a market genius to buy JNJ in 1980. It was already a well-known blue chip with a proven track record of paying -- and increasing -- dividends.

Time and dividend reinvestment provided 475 additional shares, an extra $874 in dividend payments in 2008 alone, and a nearly doubled total return -- and a stronger retirement portfolio.

Finding the next dividend payer
To make the same kind of investment today, you need to find strong, stable companies with a history of regular and increasing dividend payments. One place to look is the Mergent Dividend Achievers Select index, which includes only stocks that have increased their dividend payments for the last 10 or more consecutive years.

Here are a few of the stocks it includes:


Current Yield

Procter & Gamble (NYSE: PG  )


Clorox (NYSE: CLX  )


Walgreen (NYSE: WAG  )


General Electric (NYSE: GE  )




Wal-Mart (NYSE: WMT  )


Source: Yahoo! Finance.

While these aren't formal recommendations, their solid track record of raising dividends is reason enough for further research.

Ask not for whom the bell tolls
I'm not saying that younger investors shouldn't also hold riskier investments like small-cap and high-growth stocks, but to paraphrase Benjamin Franklin, an ounce of planning is worth a pound of retirement prosperity. And that means dividend stocks.

Building a portfolio of dividend-paying stocks early on is just one tenet of a successful retirement plan. For additional tips, consider a free 30-day trial to Motley Fool Rule Your Retirement where advisor Robert Brokamp helps investors approaching, nearing, or already in retirement develop plans to properly manage wealth.

Your free trial includes model portfolios, the nitty-gritty on important asset classes, retirement calculators, and recommended investments -- and you can click here to get started. There's no obligation to subscribe.

Todd Wenning hopes everyone had a great Labor Day weekend. He owns shares of Procter & Gamble, but of no other company mentioned. Johnson & Johnson is an Income Investor recommendation. Wal-Mart is an Inside Value choice. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (15)

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 September 02, 2008, at 7:35 PM, HOYAFAN wrote:

    You forgot to mention that IBM cut its dividend just several years ago.Having been an employee for 30 years I remember the anger of the rank and file the day the anouncement was declared.

  • Report this Comment On September 03, 2008, at 4:35 PM, mplaut100 wrote:

    I think that any dividend portfolio should consider MLPs. They are stable businesses run to pay out to the shareholders.

    I recommend LINE. Its gas is almost fully hedged for the next 3 years and a good chunk of its oil. Even if Oil dropped to $50 it could still pay the distribution. And it will probably increase its payout.

    I also recommend MWE.

  • Report this Comment On September 03, 2008, at 4:58 PM, martinfrosa wrote:

    It is always easy to look in the rear view mirror and say, we should have bought Pepsi or J&J for the dividends! If you buy J&J today, you will get no such returns. In addition, the stocks mentioned are already too big to grow fast enough to produce the kind of returns. As the previous reader mentioned, todays investors should consider MLPs. My favorite is ETP.

  • Report this Comment On September 03, 2008, at 9:12 PM, KENREN wrote:

    What is a MLP? How do they work? I'm trying to learn all I can and in this market, I find myself frozen! I just don't know where I can grow my money with peace of mind and safety. Thanks for your help.

  • Report this Comment On September 04, 2008, at 5:33 AM, mplaut100 wrote:

    There is an old Wachovia report that is supposed to explain MLPs very well.

    Basically, they are different animals from a regular corporation. They are set up to pass on all or most of their operating profits to their shareholders (really called "unitholders") and they borrow or issue shares when they want to grow.

    They seek stable, income producing properties, and usually specialize in one area. Examples are stable, low decline oil and gas properties, such as those operated by LINE, and another example is gas pipeline gathering and transmission such as are operated by MWE.

    LINE, for example, seeks properties that produce steadily, without big yearly declines, and in many cases have already been producing for years to the characteristics of the fields are well known. At their current rates of production they have about 20 years worth of reserves.

    After that they hedge their future production against falls in price. This limits their upside but makes their ability to pay their distribution very solid. LINE is very thoroughly hedged for the next three years and could pay their distribution even if oil falls to $50, which is not likely at all.

    The main drawback is that their finances are very different from other companies. Because of mark-to-market rules they can show huge losses on their hedging commitments (like last quarter when prices rose sharply). These are just accounting artifacts and mean nothing but they sometimes spook the markets. This quarter LINE will show huge gains as prices have fallen back.

    Also the distributions are tax sheltered, though it should be said that taxes are more complicated than a regular corporation. LINE has user-friendly tax information on its website and some tax programs can import the necessary information directly.

    I cannot understand why Motley Fool's dividend gurus do not recommend MLPs. Pipleline MLPs pay out around 8% and the production MLPs like line are now paying out more than 10%!

    Good places for further research are the Yahoo LINE boards and the Investorvillage LINE and MLPs board.

  • Report this Comment On September 05, 2008, at 3:33 PM, jmweese wrote:

    Yes, MF does recommend some MLPs and I happen to own one (and wish I would have bought the other MF recommended MLF in 2004 when I wanted to). The one issue effecting MLPs are their reliance on debt financing. In today's tight credit market such debt can be expensive or even non-existant. Both of my MLPs (one a MF pick and one not) are down over 12% for the year but I still feel strongly for one of them as it is currently paying a 7% yield.

    However, as an accountant, I would recommend you do your tax research as purchasing an MLP is much different that purchasing a regular stock. Purchasing a MLP makes you a partner in the firm which means you receive a K-1 at year end. If you have your taxes professionally completed, this is not a problem. If you do them yourself, this can be complex so be sure to do your homework.

    Overall, I use MLPs to fulfill my REIT portion of my portfolio (yes, REITs are different animals but a very similar concept).


    P.S. For what it is worth, I still think Pepsi represents a good dividend play.

  • Report this Comment On September 05, 2008, at 7:10 PM, UVAFool wrote:

    I own several REITs which are also down this year. I am not very familiar with the MLPs.

    My best dividend producer right now is actually a Mortgage REIT called Annaly Capital Management, Inc. (NLY) paying 14.6% only because the price of the stock is down to 15 from 21 in March. This was also an MF recommendation.

    From Investopedia:

    To qualify as an REIT with the IRS, a real estate company must agree to pay out in dividends at least 90% of its taxable profit (and fulfill additional but less important requirements). By having REIT status, a company avoids corporate income tax.

    I also own some standard dividend producers like MRK and PFE and AT&T.


  • Report this Comment On September 07, 2008, at 8:48 AM, mattmenghi wrote:

    Should I buy dividend paying stocks and reinvest the dividends in a Roth IRA? Wouldn't that eleviate the need to track the reinvestments for tax purposes as it would be tax free down the road? I'm new to this.

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