You need dividend-paying stocks. There, I said it.
That's an investing truth I've been wanting to get off my chest for a long time. Even if your portfolio is stocked with the likes of Amazon.com (NASDAQ:AMZN), Juniper Networks (NASDAQ:JNPR), or Shuffle Master (NASDAQ:SHFL) -- three companies that analysts predict will grow more than 20% per year over the next five years -- you need dividend payers.
You may not think that's the case. In fact, you might think dividends are as boring as Alan Greenspan lecturing on bond curves.
Don't think that way.
Put simply, dividends are the most effective way to help your portfolio grow over time. They won't necessarily help a stock go parabolic in a year like Google after its IPO, but research shows that dividends are critical to beating the market with less volatility. That's because they'll prop you up even when the market turns south or your growth issues stall.
Sounds great.
How do I start?
If you're new to investing, don't worry about it. You already know how to pick solid dividend-paying stocks.
That may sound mystical, but it's not. Every single person is capable of selecting an equity that pays a quality dividend. Just think about your local grocery store.
What's down aisle five? Soft drinks. Aisle seven? Snacks. Aisle 14? Toothpaste and Band-Aids.
There's your dividend short list.
What the heck am I talking about?
Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) may be the obvious choices in the soft drink industry. These brands are not only familiar to you and your friends, but also among the strongest and most recognizable in the world. That kind of operational strength has helped both companies steadily increase their dividend payments over the years.
Take PepsiCo, for example. In June 2001, the company paid a quarterly dividend of $0.15 per share. In June 2006, PepsiCo paid a quarterly dividend of $0.30 per share. I know my math -- that's a dividend double. And that's very rewarding for shareholders.
A company that can substantially increase its dividend over time will give you a nice little present decades from now: the "effective yield." That's the future yield on your current invested capital. Say you bought a share of a stock that is yielding 2% today; if the dividend triples 10 years from now, your effective yield will be 6%. If in 20 years the dividend goes up five times, your yield will be 10%. That's probably enough to beat the market -- even if your stock price doesn't move up at all.
Satisfying snacks
Down the snack aisle, we see one of my personal favorites, Pringles. Who owns Pringles? Procter & Gamble (NYSE:PG). I know P&G, I use its toothpastes and, after the merger with Gillette, its razors. This is another solid blue-chip business with omnipresent products. And like Coke and Pepsi, it's paid a growing dividend for years: The dividend has increased from $0.16 per quarter in 2000 to $0.31 today. That's helped investors earn nearly 14% annual returns over the same time frame.
And what's next to the razors? Band-Aids: The Johnson & Johnson (NYSE:JNJ) product that's all but replaced the word "bandage." This company has been a solid Dow component for a good long time, and it too has more than doubled its dividend since 2001. And while the stock may be in a bit of a slump right now, the 2.5% yield means investors are still getting paid.
Foolish final thoughts
Dividend-paying stocks should be in every single portfolio. They'll ballast your portfolio against volatility and help you beat the market along the way.
But familiar brands combined with stellar dividend histories are only a starting point for research. Obviously, you shouldn't buy any stock based on its history alone. Cash flow characteristics, current yield, recent merger events -- all of these things are important in your decision-making process.
If you'd like to learn about the very best dividend opportunities on the market, I recommend you check out Mathew Emmert's Motley Fool Income Investor service. Not only does he offer specific recommendations, but he helps you understand which of his recommendations are the best fit for your portfolio. Sounds good, no? Click here to get started free for 30 days. There is absolutely no obligation to subscribe.
Fool contributor Steven Mallas owns shares of Coca-Cola. Coca-Cola is an Inside Value recommendation. Shuffle Master and Amazon.com are Stock Advisor picks. Johnson & Johnson is an Income Investor pick. The Fool has a disclosure policy.
