One of the best aspects of investing in the stock market is that multiple strategies work. Whether you prefer value stocks, growth-oriented companies, small-caps, or brand-name companies, patience can pay off handsomely on Wall Street.
But if my arm were twisted, I'd have to point to dividend stock investing as one of the standout moneymaking strategies.
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Dividend stocks are a golden ticket to riches
Nine years ago, J.P. Morgan Asset Management, a division of money-center bank JPMorgan Chase, released a report that compared the performance of publicly traded companies that initiated and grew their payouts over a 40-year stretch (1972-2012) to public companies that didn't pay a dividend. The results showed that the dividend-paying stocks mopped the floor with the non-dividend payers. All told, dividend stocks averaged a 9.5% annual return over four decades, which compared to a meager 1.6% annualized return for those companies without a dividend over the same stretch.
While the magnitude of the outperformance might be surprising, the actual result – i.e., dividend stocks outperforming non-dividend stocks over the long run -- shouldn't be a shock. Companies that pay a dividend are often profitable, time-tested, and have transparent long-term growth outlooks. They're precisely the type of businesses we'd expect to increase in value over time.
Income stocks can also be excellent hedges against uncertainty and inflation. With the U.S. inflation rate hitting a fresh 40-year high of 7.9% last week, it's become almost impossible for investors to find sources of near-guaranteed income (e.g., U.S. Treasury bonds) that come anywhere close to the prevailing inflation rate. Dividend stock payouts can help partially or fully offset inflation, while share ownership also gives investors the opportunity to grow their wealth.
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There are quite a few well-known dividend superstars
There are a number of well-known, exceptional dividend stocks that investors have come to trust over multiple decades.
Take healthcare conglomerate Johnson & Johnson (JNJ 0.82%) as an example. Not only is only Johnson & Johnson on track to increase its base annual payout for a 60th consecutive year next month, but it's one of only two publicly traded companies with the highly coveted AAA credit rating from Standard & Poor's. That's the highest rating the agency doles out, and is one grade above the U.S. federal government. Put in another context, S&P has more confidence in J&J repaying its outstanding debts than it does of the U.S. government making good on its own debts. That's saying something.
Consumer goods giant Procter & Gamble (PG 1.52%) is another dividend superstar that income investors regularly rely on. Although it doesn't have the highest possible credit rating, Procter & Gamble has increased its base annual payout for 65 consecutive years. What's more, it's been parsing out a dividend to its shareholders for the past 131 years. Providing basic necessity goods may be boring, but it's a highly profitable operating model that affords P&G substantial pricing power.
On the high-yield spectrum, mortgage real estate investment trust Annaly Capital Management (NLY 0.55%) has turned heads since its inception a quarter of a century ago. Annaly has paid over $20 billion in dividends since going public, and has averaged a yield of around 10% over the past two decades. The company's highly transparent operating model allows its payout to completely offset historically high inflation.
But none of these companies can hold a candle to what one completely under-the-radar dividend stock has accomplished over the very long run.
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This is the greatest income stock of all time (and you've probably never heard of it)
Although it doesn't have a high yield or a 65-year streak of boosting its base annual payout like P&G, a case can be made that small-cap water utility stock York Water (YORW 1.00%) is the greatest dividend stock of all time.
The reality is few folks have probably ever heard of York Water. This is a company that provides water and wastewater services to 51 municipalities spanning three counties in South-Central Pennsylvania. Last year, the company's biggest acquisition totaled $12 million and netted it approximately 1,800 new wastewater customers. In other words, York Water is about as off-the-radar as they come for public companies.
But get this: York Water has been paying an annual dividend to its shareholders since James Madison was president back in 1816. This 206-year (and counting) streak of rewarding its shareholders is more than six decades longer than Stanley Black & Decker, which has been paying its shareholders a dividend for 145 consecutive years. Stanley Black & Decker is No. 2 on the list of longest consecutive payouts.
I believe it's also worth pointing out that York Water has increased its base annual payout in each of the past 20 years. Including dividends paid, York has returned approximately 1,360% since the beginning of the century, which quadruples the 345% return of the broad-based S&P 500 over the same stretch. Who said you have to buy tech stocks to get rich?
The beauty of this great dividend stock is the predictability of its business. If you own a home or rent, you almost certainly need water and wastewater services. This leads to a predictable level of demand and transparent cash flow. This cash flow transparency allows the company to invest in its infrastructure and make acquisitions without compromising its profitability or dividend.
Furthermore, most utilities in the U.S. operate as monopolies or duopolies. This is to say that homeowners and renters don't have much choice where their electricity, natural gas, or water services come from. This provides another layer of predictability that makes York Water's dividend so rock-solid.
As noted, York Water's yield of 1.7% pales in comparison to the likes of Annaly Capital Management. But in terms of putting investors first, York's 206-year dividend streak vaults it into a class of its own.
