Buried treasure is alluring. The term evokes images of doubloons strewn about a sunken Spanish galleon waiting at the bottom of the ocean for an intrepid explorer. But where is it written that all treasure has to be hidden?
'X' never marks the spot
The search for treasure rarely goes according to plan. Indiana Jones had to contend with everything from poison-tipped darts to a race of bloodthirsty, subterranean cave dwellers. Captain Jack Sparrow had to outwit a cursed band of pirate apparitions. Even the kids from Goonies had to stay one step ahead of the Fertelli gang and a series of deadly booby traps.
For investors, there is a far less harrowing path to riches. To beat the market, you don't have to play Russian roulette with small-cap pharmaceutical bullets such as Abgenix (NASDAQ:ABGX). You need only pick up the best of the tried-and-true S&P 500 index.
Aristocrat (noun): One considered the best of its kind
Three of every four companies in the S&P pay dividends, and S&P members are set to pay out a staggering $203 billion in aggregate dividend payments this year. But of the 378 firms that reward shareholders, a much smaller number has been doing so for more than two decades. Of those, fewer still have increased payments on a regular basis. And only several dozen have both paid and raised their dividend payment every single calendar year for the past 25 years.
Among the S&P, these are the elite -- the aristocracy.
The rich keep getting richer
McGraw-Hill's (NYSE:MHP) Standard & Poor's launched its Dividend Aristocrats index in May. The index -- of which McGraw is a storied member -- is made up of 57 companies that consistently raise payouts. It is distributed among a broad range of industries and split roughly 50/50 between growth and value stocks.
The end result? A well-balanced portfolio of stable, blue-chip cash cows that offers better-than-average returns with less volatility.
Other members of the dividend aristocracy include Clorox (NYSE:CLX), Nucor (NYSE:NUE), and Walgreen (NYSE:WAG), as well as more obscure firms such as Sigma-Aldrich. Some, such as Wal-Mart and Bank of America (NYSE:BAC), barely made the 25-year cut, while Procter & Gamble (NYSE:PG) and other workhorses have been increasing dividends uninterrupted for twice that long. In all, it's a portfolio of easily identified market beaters.
| Index | 3-Yr. Return | 5-Yr. Return | 10-Yr. Return | 15-Yr.-Return |
|---|---|---|---|---|
| S&P Div. Aristocrats | 9.1% |
9.7% |
14.5% | 13.4% |
| S&P 500 | 3.6% | -2.3% | 12.1% | 10.9% |
Dividend Aristocrats plus
Although the S&P's Dividend Aristocrats have easily outperformed the broader markets for the past five-, 10-, and 15-year periods, the list is nothing but a starting point for the truly hungry dividend investor.
For example, you won't find iStar Financial (NYSE:SFI) on the list -- it wasn't even around 25 years ago. That doesn't mean it's not a valuable investment. Since the company became the first Motley FoolIncome Investor selection in August 2003, the shares have been good as gold. (iStar is still a great company, but Income Investor lead analyst Mathew Emmert isn't recommending it to new investors because it has since developed some overly generous management compensation practices.)
The stock originally offered a generous $2.65-per-share dividend to subscribers, which has since been steadily bumped up to $2.93 -- for an effective yield in excess of 8.3% and a hefty total return of 29.8%.
The makings of an Aristocrat
Dividend increases have long been billed as a positive sign, but the real key is not necessarily a rising dividend, but a rising dividend accompanied by a steady payout ratio. Dividend Aristocrats are currently handing out a shade less than 40% of their earnings, vs. almost 50% for the Dow Jones Select Dividend Index and more than 60% for the 50 highest-yielding stocks in the S&P. What does that mean? The Aristocrats are not only rewarding shareholders, but they're also leaving enough fuel in the tank to drive further growth.
For each issue of Income Investor, Mathew scours the market for companies with long dividend histories and strict payout ratios of less than 60% of free cash flow -- earnings after capital expenditures. But those are only two of the traits he seeks.
To view Mathew's four dozen market-beating income stocks, enjoy a 30-day free trial of Income Investor. There's no obligation to subscribe, and a trial includes access to all back issues and previous picks, mid-month reports, current risk-adjusted values, and the Income Investor discussion boards, where Mathew posts regularly and where you'll find hordes of like-minded investors sharing wisdom, ideas, and analysis.
We all like getting a raise, so why not search for those firms that have made a habit out of writing bigger checks to their owners with each passing year? It may not make for the most exciting quest, but it can certainly make your portfolio shine.
Fool contributor Nathan Slaughter still considers Goonies among his favorite rainy-day movies. He owns shares of Bank of America. iStar Financial is a Motley Fool Income Investor recommendation. The Fool may be amusing, but it has a seriousdisclosure policy.
