Ever hear the old saying that "money doesn't grow on trees"? Well, that old saw has outlived its usefulness and needs to be retired. These days, if you invest your cash right, you can find yourself the proud owner of your very own money tree.
Smart investors know that the best kind of investment is one that, like a healthy tree:
- Has a strong core
- Grows over time
- Renews itself regularly
Best of all, it's easy to discover the companies that will act as your very own money trees. They're the ones that pay regular dividends.
Core strength
Almost by definition, dividend-paying companies have to be among the strongest companies around. To be capable of making that payment in the first place, a company has to have the cash on hand. It's not just a matter of earning enough money to pay the cash. It's earning enough money to pay the dividends after accounting for anticipated growth that makes paying dividends such an impressive display of corporate strength.
No company can get away with regularly borrowing just to pay its ordinary dividend. No bondholder or bank will continue to loan new money to a company that seems incapable of funding even minor growth from the cash flow it keeps after paying dividends. So to be sustainable, dividends have to come from money that was truly earned by the company and is freely available to be distributed to its owners.
Healthy growth
Despite popular misconception, growth doesn't stop the instant a company decides to pay a dividend. In fact, a recent academic study suggests that companies that pay reasonable dividends can actually grow faster than non-dividend payers.
That may sound counterintuitive. But consider that the act of paying dividends forces companies to make careful choices about what projects they pursue, so they're more likely to only approve growth-oriented projects that have a strong probability of succeeding.
The discipline enforced by the payment helps make sure that the company can actually reach those targets. The following companies, in fact, have not only paid dividends for at least a decade, but their solid growth has allowed them to raise those payments substantially over that time, too:
|
Company |
1997 |
2007 |
Total |
|---|---|---|---|
|
McGraw-Hill |
$0.36 |
$0.82 |
128% |
|
US Bancorp |
$0.49 |
$1.60 |
227% |
|
Allstate |
$0.48 |
$1.52 |
217% |
|
Wal-Mart |
$0.14 |
$0.88 |
547% |
|
Paychex |
$0.08 |
$0.84 |
950% |
|
Citigroup |
$0.20 |
$2.16 |
980% |
|
Harley-Davidson |
$0.07 |
$0.96 |
1,322% |
Dividends: your renewable resource
The best part, though, is that once companies start paying regular dividends, they generally try to keep paying them. The best businesses throw off tons of cash to their owners every year and then turn around and use the next year to generate a whole new stack of money to hand out yet again.
Money may never really grow on real trees, but with the right dividend-paying companies making up the core of your portfolio, you may just find yourself with the next best thing -- a strong, growing, reliable, cash-generating machine. If you're ready to sow the seeds for your money trees, our Income Investor service is devoted to finding the market's best dividend stocks. You can see our team's top picks for new money with a no-obligation, 30-day free trial.
At the time of publication, Fool contributor Chuck Saletta did not directly own shares of any company mentioned in this article, but his wife owned shares of Harley-Davidson. US Bancorp is an Income Investor recommendation and Wal-Mart is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.
