My financial goal (and I hope it's your goal, too) is to achieve financial security with a side of luxury. I think that's conservative enough to be realistic and aggressive enough to be worthwhile. The question is how to realize this goal in a market that is always unpredictable and at times downright unsavory.
Growth stocks will treat you well during good times, but if you're not a market-timer (and who can accurately claim to be that?), they will ride roughshod over your portfolio when the chips are down. That was the tech bubble in short order -- a time when the market took a severe beating.
So what doomed the tech duds to failure? None paid dividends -- the market's only guaranteed return.
Cash is good
Companies that paid dividends fared better both before and after the bubble burst. From 1980 to 2002 -- a time period spanning two bull markets -- dividend payers outran non-payers by nearly 3%. During the bear years of 2002 to 2004, dividend payers thumped non-payers to the tune of 14%.
I'll be the first to admit that these impressive results aren't the result of dividends alone -- they are not a magical elixir. Rather, rising dividends are one way to identify superior companies, which is why investors who aspire to beat the market should keep track of the firms that are strong enough to generate growth and pay out a substantial dividend. Such formidable companies also tend to possess other hallmarks of winning investments: focused management, fiscal discipline, and serious competitive advantages.
Model payers
Don't believe me? Altria has been the market's best-performing stock since 1950, and it pays a dividend every quarter. More impressive is that Altria's dividend is a rising dividend. In just the past five years, Altria has grown its dividend at the sizable annual rate of 8.7%. Coca-Cola
These are the types of companies that make a winning portfolio, and I watch earnings season like a hawk to try and find other success stories. I want to find the companies that announce greater dividends while maintaining a responsible payout ratio -- the percentage of profits a company pays to shareholders in the form of dividends. In the past week or so, these candidates have emerged:
| Company | Market Cap* | Recent Dividend Increase | Yield |
|---|---|---|---|
|
Wells Fargo |
$104,750 | 8.3% | 3.35% |
|
Pulte Homes |
$12,330 |
60% | 0.34% |
|
Anheuser-Busch |
$34,760 | 10% | 2.41% |
|
British American Tobacco |
$41,310 | 10% | 6.10% |
|
Reynolds American |
$12,350 | 11% | 5.01% |
|
Foothill Independent Bancorp |
$172 | 15% | 2.96% |
Wells Fargo boasts 23 dividend increases since 1988, Anheuser-Busch has 29 consecutive years of dividend increases, and Reynolds American has paid a dividend every quarter since going public in 1999. For such a small company, even Foothill's dividend history is strong. It has paid a dividend every quarter since September 1999.
Foolish final thoughts
Master investor Warren Buffett has said that there are two cardinal rules to investing. No. 1: Never lose money. No. 2: Never forget rule No. 1. By finding the market's rising dividends, you abide by these rules and are rewarded twofold. You ballast your portfolio with cash and put the power of superior companies to work for you.
A 30-day free trial to Motley Fool Income Investor will give you access to four dozen of the best dividend payers on the market today -- with two more added each month. There's no obligation to subscribe, and a trial includes access to all 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.Click hereto learn more about the market's only money-back guarantee.
Tim Hanson owns none of the companies mentioned in this article. Coca-Cola and Anheuser-Busch are Motley Fool Inside Value recommendations. At the Fool, no writer is too cool for disclosure ... and Tim's pretty darn cool.
