When you boil them down, most successful market-beating investment strategies tell you to:

  • Buy the right companies
  • Pay the right price
  • Wait for the market to realize your brilliant foresight

These strategies are great -- in theory. There's typically one small problem: It's your money at risk while you wait. From the time you make your purchase to the time your investment works out, the market will have its own ideas as to what your companies are worth. The odds are pretty strong that there will be times when it does not agree with you.

Waiting on greatness
When the market disagrees with you, its theory -- not yours -- dictates the price of your holdings. Of course, if your outlook proves to be right, the market will eventually change its tune. Patience is a virtue in investing, but when you're looking at a 25% or more loss early in the game, it's tough to be patient. After all, you've got real money invested, and (at least on paper) that money has vanished into thin air.

Fortunately, there is a way to take the edge off the pain (and no, it doesn't involve black market medications or deep-tissue massages). You can insist on getting paid for your time by purchasing companies that have a history of paying their owners well through dividends and look likely to continue that behavior. That way, even if it takes years for the market to catch up with your way of thinking, at least you've gotten some cash for your efforts.

That's exactly why my friend and colleague Mathew Emmert looks for solid, dividend-paying companies for Motley Fool Income Investor. Not only can these firms crush the market over time if they're bought when the price is right, but they will also pay you to wait for that time to pass. As we dividend-focused investors know, there's nothing quite as nice as cold, hard cash in your pocket to help get through one of the market's periodic mood swings (like oh, I don't know, right now).

Watch your step!
Of course, not any dividend-paying stock will do. To beat the market over the long term, those dividends must be backed up by solid businesses with staying power. If a company has an attractive yield and a lousy business, the dividend will get slashed. Just ask shareholders of General Motors (NYSE:GM) how well they liked seeing their payout cut in half this year. While you're at it, check in with Eastman Kodak (NYSE:EK) owners about how much they enjoyed seeing their annual income fall from $1.80 per stub all the way down to $0.50.

Fortunately, both of those businesses started to deteriorate well before their payouts were slashed. GM, after all, had been losing market share for years and lost money throughout 2005 before cutting its payment. Kodak was both a clear latecomer to the digital photography revolution and had significant infrastructure set up to support its analog film business. It was seriously only a matter of time before its dividend was slashed so it could retool its business. Both of these companies serve as painful reminders that dividends are never guaranteed.

The good news, on the other hand, is that there was plenty of advanced warning before the cuts took place. An investor paying attention to the businesses behind those stocks should have been able to tell the dividends were at risk and could have taken the appropriate action. That's yet another advantage of dividend-focused investing, on top of getting paid to wait. While dividends aren't guaranteed, companies will often try to keep their payments intact until they're absolutely forced to lower them. By paying attention, you can often get out before a dividend cut takes the stock down with it.

The keys to success
Of course, like any other successful strategy, dividend-focused investing relies on finding the right companies trading at the right prices. In this case, the right companies are those that:

  • Have a strong underlying business
  • Have a history of paying their owners well
  • Consistently post higher cash flow numbers than they pay to shareholders
  • Trade at a decent price when compared to their underlying worth

The table below shows a handful of companies that meet those criteria. Each one is an extremely strong competitor in its industry, and each has paid and sustained a decent dividend for several years. In fact, they've all raised their payouts since the beginning of 2005.


Current Yield*

Trailing PE*

Cedar Fair (NYSE:FUN)






Verizon (NYSE:VZ)



Washington Mutual (NYSE:WM)



*As of 5/21/2006

Regardless of what the market may do to any of these companies' stocks, in the short term they're certainly trading at reasonable valuations. They also offer attractive payments while you wait. That's not a bad set of qualities to have. Over time, in fact, history shows that the combination of a solid payment and a decent valuation provides a one-two punch that usually knocks the market for a loop. It's for this reason, in fact, that Income Investor has managed to outperform the S&P 500 over the life of the service.

The Foolish bottom line
As Mathew's performance with Income Investor shows us, you can beat the market over time with a dividend-focused strategy. Such a strategy will also assure that you get paid while you wait for the market to realize just how valuable your companies truly are. After all, it's your money at risk, and you deserve to be rewarded for your efforts. There's simply no better reward than cold, hard cash.

Are you ready to get paid by your investments? Click here to join Income Investor free for 30 days and start getting directly rewarded for the time and money you put into the market.

At the time of publication, Fool contributor Chuck Saletta owned shares of General Motors. Cedar Fair is an Income Investor recommendation. The Fool has a disclosure policy.