Smart investors like you want to build wealth for life by beating the market. You want to stay ahead of the masses who stash their money in savings accounts, bonds, and even index funds. You certainly don't want to lose to them. There's no feeling worse than knowing that you'd be doing better by doing nothing.

But you take on the risk of losing to the market if you stash substantial portions of your hard-earned dollars in non-dividend-payers, underperformers, or, worst of all, non-dividend-paying underperformers. Because when your investment dollars stagnate, even the lowly T-bill will take you to the woodshed.

The greatest growth is fueled by dividends
Master investors like former Vanguard Windsor Fund manager John Neff knew that a solid dividend payer is a lifelong investment. During his 32 years at the helm, Neff beat the market by more than three percentage points each year on the back of dividends. That's a true dividend dynasty. And you can build one, too.

Building your dividend dynasty
(NYSE:WMT) has been one of the market's best-performing stocks, returning nearly 100,000% since its IPO. And it's been paying and increasing its dividend ever since it first declared one in 1974. That's proof positive that a dividend doesn't hamper growth.

Another great long-term investment has been 3M (NYSE:MMM), which has paid a dividend in every quarter since 1916. And Bank of America (NYSE:BAC), another long-haul achiever, boasts nearly 30 years of dividend increases and 13% annualized dividend growth over the past 10. Not only did these dividends put money into shareholders' pockets, they also indicated that executives were confident in the future, and that their business models were generating substantial amounts of cash.

These are good companies now, but 15 years ago, they could have been the foundation of your dividend dynasty -- a source of financial security for you and your family. Former Microsoft (NASDAQ:MSFT) CFO John Connors expressed it best when he said, "Declaring a dividend demonstrates the board's confidence in the company's long-term growth opportunities and financial strength." In recent years Microsoft declared its own dividend (it currently yields 1.2%), and given its balance sheet and competitive advantages, this could be another dynasty in the making.

The secret to success
It may shock you to hear that the best stocks are not always those with the best products, the biggest revenues, or even the largest profits. The best investment opportunities are those run by managers who want to create maximum shareholder value. You'll find amazing winners among unknown payers such as Motley Fool Income Investor recommendation South Jersey Industries. The boring old natural gas company has returned more than 22% per year over the past five years. Compare that with the performance of such big-name non-payers as Napster (NASDAQ:NAPS) and Ciena (NASDAQ:CIEN) -- two tech companies that simply haven't been able to consistently generate cash and create long-term shareholder value.

Great management can come from anywhere, and it builds a company with rising earnings per share, limited dilution, manageable debt, and a consistent ability to deploy capital and use its assets effectively. That leads to the richest treasure of all: cold hard cash. And that allows a company to reward shareholders with a growing dividend.

As I see it, the dividend is the key to it all.

The cornerstones of tomorrow's dynasty
The stocks of tomorrow's dividend dynasty aren't just the ones paying substantial yields. If that were the case, everybody and his or her broker would be building one. Tomorrow's dividend dynasties are like South Jersey Industries -- both dividend and capital-gains-growth opportunities. That means they're:

  1. Underfollowed.
  2. Undervalued.
  3. Underappreciated.
  4. Committed to creating shareholder value.

That's the dividend dynasty recipe for success. Search for these traits and don't ignore boring industries -- utilities, insurers, consumer products, banks -- or even foreign countries.

That's how Income Investor does it, and subscribers are besting the market by five percentage points as a result. To view our favorite income stocks, enjoy a free 30-day trial of Income Investor.

This article was originally published on June 29, 2005. It has been updated.

Tim Hanson owns shares of 3M. Wal-Mart, 3M, and Microsoft are Motley Fool Inside Value recommendations. Bank of America is an Income Investor recommendation. No Fool is too cool for disclosure.