If you've ever lost 5% or more in a stock in a day on no news, you're not alone. Stocks can be a fickle bunch, and sometimes it seems like everybody else knows something you don't.
But forget stocks altogether? That's what my Foolish colleague Tim Beyers argued a few months back. His point was that some folks are best served by index funds, and could even do a little bit better than that by passing their savings along to savvy, low-cost fund managers.
And that's a fair point. But funds can be fickle as well. A recent study published in the Journal of Financial Planning revealed that just 10% of actively managed large-cap funds outperformed their benchmark from 1983 to 2003. And just 3% of mid-cap funds could boast outperformance. So in a day and age that advertises more than 7,000 mutual funds, that's a lot of losers.
There's a better way.
Less work, more return
Sloth is one of the seven deadly sins, but it can be a virtue when it comes to earning market-beating returns.
Indeed, as Jeremy Siegel showed in his new book, The Future for Investors, the original members of the S&P 500 outperformed the evolving index by a little more than a percentage point per year from 1957 to 2005. Even better, some select dividend-paying members, such as Altria (NYSE:MO), Abbott Laboratories (NYSE:ABT), PepsiCo (NYSE:PEP), and Coca-Cola (NYSE:KO), outperformed the index by more than 5 percentage points.
Sound measly? Those extra 5 percentage points make a $900,000 difference over 50 years on a $1,000 investment. That's, um, a heckuva a lot.
What's the secret?
Actually, there are two:
- High dividend yields
- Dividend reinvestment
Siegel theorizes that the S&P 500 adds companies to the index at the worst time: when they're overvalued. This means they're effectively paying too high a price and getting too low a yield.
In the real world, all this action would also incur the two Ts that kill returns: Taxes and Trading costs.
Investors who bought and held the originals, on the other hand, would have been able to benefit from market cycles by reinvesting dividends in the stocks when they were bargains. By never selling, they also would have deferred taxes and allowed the full value of their growing fortune to compound.
Some actionable advice
So how can we put this model to work for us?
First, find companies that will be around in 50 years. That means they don't go bankrupt and they aren't rendered obsolete by technology. Second, find companies that pay sizable dividends that can be reinvested to purchase additional shares.
These are exactly the kinds of stocks you can buy and forget about. The four mentioned above fit that bill, and here are three more candidates:
|
Company |
Yield |
Industry |
|---|---|---|
|
Sysco (NYSE:SYY) |
2.1% |
Food distribution |
|
Bank of America (NYSE:BAC) |
4.4% |
Finance |
|
Pitney Bowes (NYSE:PBI) |
2.9% |
Office services |
All seven of these companies have a few traits that make them more durable than average. In addition to paying solid dividends that have held up over time, they're also established and large. The smallest, Pitney Bowes, is a $10 billion company. Bank of America, the largest, is valued at $215 billion. Most of them also operate in industries -- banking, consumer staples, food distribution, and office services -- where there is not much threat of a disruptive innovation. As a pharmaceutical company, Abbott Labs is the most threatened, but the company benefits from diverse revenue pools, including pharmaceuticals, diagnostics, and nutritionals.
Simply put, these are seven dividend-paying companies you can confidently reinvest in to reap regular gains.
The Foolish bottom line
Not for nothing, Sysco, Bank of America, and Pitney Bowes are Motley Fool Income Investor recommendations. That's because in addition to highlighting some of the highest yields on the market, Fool dividend guru Mathew Emmert also focuses on cash-rich companies with staying power. These stocks grow their dividends year after year after year, and are vital to any portfolio.
If you'd like a few more stock ideas to help you put your entire portfolio on autopilot, click here to tour Income Investor free for 30 days. You're smart to be a little lazy, beat the market by a few percentage points per year, and be a whole lot richer in the end.
Tim Hanson does not own shares of any company mentioned in this article. Coca-Cola is an Inside Value recommendation. No Fool is too cool for disclosure . and Tim's pretty darn cool.
