At parties, two questions are pretty much guaranteed once folks realize I work for the Fool: "How is your portfolio doing lately?" and "Got any hot stock ideas?" The latter is liked least by stock pickers, because whoever's asking is rarely looking for a thesis -- he just wants a name.

Let's ignore the fact that everyone is looking for handouts. That's understandable. Heck, I'm constantly looking for ideas myself. But the answers to those questions are truly of little value to the person asking, because both are focused on the short term.

What's curious is that no one has yet to ask me about my overall investing strategy or my plan for building wealth. These questions are really one and the same, but both are Foolish and have answers worth their weight in gold. It's the same as the "giving a man a meal or teaching him to fish" analogy. Rather than waiting for one of these questions to be asked, I'm simply going to answer them right here.

The answer to the question nobody asks
I plan to get wealthy gradually over a fairly long period of time by regularly adding new funds to my investments, and by focusing the majority of my investments on companies that pay dividends.

Success in this strategy requires purchasing companies at a reasonable price, with a healthy dividend already in place, and watching that dividend grow. That's a tall order, but anyone who looks at quotes online or in the newspaper knows that there are hundreds of companies that pay dividends of 3% or more. But what about companies that grow their dividend at a healthy rate of, say, 10% or more for 10 years? If you started in 1996 and were sizing things up in 2006, were there companies that grew their dividends so quickly?

I'm happy to say that there were. In fact after running a screen, I found that there were 187 companies that fit the bill. A sample of those 187 companies is below, along with the largest and smallest dividend increase each company made.

Company

10-Yr. Dividend CAGR

Smallest Increase

Largest Increase

Paychex (NASDAQ:PAYX)

31.3%

4.8%

65.2%

Watsco (NYSE:WSO)

27.0%

0%

90%

Applebee's International (NASDAQ:APPB)

15.0%

0.60%

25%

General Electric (NYSE:GE)

12.4%

5.50%

17.10%

Vornado Realty Trust (NYSE:VNO)

10.8%

3.40%

20.60%

Alcoa (NYSE:AA)

10.6%

0%

61.20%

Data provided by Capital IQ, a division of Standard & Poor's.

A few notable things stand out in this list:

  1. Companies with robust dividend growth can be large or small. For example, Watsco's market cap is less than $2 billion, while GE's is more than $300 billion.
  2. Strong dividend growth isn't exclusive to companies that start out with minuscule dividend payouts. Six Dow components made the list.
  3. Dividend growth can be found in a wide variety of industries. The list above includes a restaurant, a payroll services provider, a real estate investment trust, a commodity-focused company, a conglomerate, and a heating and air-conditioning firm. The entire list of 187 companies contains a wider variety including retailers, energy companies, and financial firms.
  4. Increases in a company's payout are lumpy. When growth in profits is strong, increases are larger. When profit growth is slim or flat, increases are small. It pays to be patient and understand the underlying quality of the business.

Foolish final thoughts
Screening shows there are plenty of companies out there that grow their dividends at high rates over long periods of time. Determining which companies are likely to do so in the future allows an investor to turn an initial portfolio with a small stream of dividends into a fountain of wealth that generates thousands of dollars in dividend payments alone. As an example of the long-term wealth creation of dividends, consider a $50,000 portfolio that starts out with either a 2% or 3% yield and grows its payout 10% each year.

Year Dividend Payment at 3% Dividend Payment at 2%
2006 $1,500 $1,000
2016 $3,356 $2,357
2026 $9,173 $6,115
2036 $23,794 $15,863


Ten percent growth is fairly heady, but as the screen shows, nearly 200 companies provided this kind of growth in an environment where payout ratios are historically low. And, of course, if you're reinvesting the dividends you receive in your early years, the payouts are going to be even more impressive in later years, when income is more important.

This dynamic is one of the main reasons I own shares in Microsoft (NASDAQ:MSFT), which is poised to raise its dividend for many years to come and was recommended in Income Investor's Cash Flow Corner feature for just that reason. But that's what chief analyst Mathew Emmert is all about: finding investment ideas that pay you now and should pay you more in the future. To date, the strategy is working: He's beating the market by 2.2 points (15.7% vs. 13.5%) over more than two years. For a free trial, which includes access to all 52 selections, the next issue of the newsletter, dedicated discussion boards, and regular updates on recommendations, click here.

Nathan Parmelee owns shares in Microsoft, but has no financial interest in any other companies mentioned. You can view his profile here . Microsoft is a Motley Fool Inside Value pick. The Motley Fool has an ironcladdisclosure policy.