Kermit Weeks has a great life. Because his geologist father asked for a 2.5% royalty from BHP Billiton in lieu of payment for helping the company find oil, Kermit and his kin are multimillionaires. Kermit's antique airplane collection was even featured in Forbes.
But that can't happen to you, right?
Actually, it can ... with dividends.
Be smart with your cash
While BHP still pays Kermit, that money is "less significant than his income from investments." You see, Kermit reinvests, and that's the secret to supercharging returns.
Reinvesting means you use dividends to buy more stock. It's a simple process, but its effect is overwhelming. While a $1,000 investment in Altria in 1980 would be worth $71,000 today, 25 years of reinvested dividends would make it worth nearly $170,000 (and you'd be earning $7,000 per year in dividends).
Multiply that effect a few times over. That's why Kermit Weeks is living in the lap of luxury.
Make your dreams come true
But you have to be smart when choosing dividend sugar daddies. Since nearly 3,000 publicly traded companies pay shareholders, that can be tricky. After all, you can't reinvest in a company that goes bankrupt.
The key to supercharging returns is to find companies that deliver capital gains and growing dividends. For Fool dividend guru Mathew Emmert, these are firms that generate substantial free cash flow (FCF) and pay out less than 50% of it to shareholders. Companies that fit this profile include:
|
Company |
FCF per share |
Dividend |
FCF Payout Ratio |
Current Yield |
|---|---|---|---|---|
|
Wells Fargo (NYSE:WFC) |
$5.01 |
$2.00 |
40% |
3.2% |
|
PPG Industries (NYSE:PPG) |
$3.92 |
$1.86 |
47% |
3.0% |
|
Mercury General (NYSE:MCY) |
$4.21 |
$1.72 |
41% |
3.6% |
|
BB&T (NYSE:BBT) |
$3.08 |
$1.46 |
47% |
3.8% |
|
PepsiCo (NYSE:PEP) |
$2.08 |
$1.01 |
49% |
1.8% |
It's no coincidence that PPG Industries and Mercury General are among Mathew's Income Investor recommendations, or that PepsiCo is the one stock Mathew has said he'd hold for the next 50 years. These are companies with enough financial strength to grow their already substantial dividends, significantly softening any future market volatility. And if you reinvest, you'll supercharge your returns like Kermit did.
In other words, these are stocks you can live off.
The Foolish bottom line
Matthew finds companies like this every month for his members, and to date, his dividend strategy is beating the market with less volatility.
Even if you have no interest in antique airplanes, living off your investments may still sound appealing. Click here to let Mathew and his Motley Fool Income Investor newsletter service help you do it.
This article was originally published on Dec. 23, 2005. It has been updated.
Tim Hanson does not own shares of any company mentioned. No Fool is too cool for disclosure ... and Tim's pretty darn cool.
