Why should you listen when Charles Mangum talks? Because this 42-year-old's Fidelity Dividend Growth fund has beaten 80% of its peers over the past decade.

Like you and me, Mangum is in pursuit of the ultimate dividend stock -- the stock that will leave investors set for life. And having trailed his competition in recent years, Mangum is hungry -- and looking for a promising stock that the market's turned its back on.

The three best S&P stocks of the past half-century
Is that ultimate stock out there? Wharton professor Jeremy Siegel's research says it is. In analyzing the top 20 S&P 500 stocks of the past half-century, Siegel found that all the best performers had a solid dividend payout. In that spirit, I'll give you three dividend stocks worth checking out for your own portfolio -- but first, I'd like to share Professor Siegel's top three stocks with you.

Third on Siegel's list was Bristol-Myers Squibb, with average annual returns of 16.4%. For perspective, $1,000 invested here at the beginning of Siegel's study would be worth more than $1.2 million today. Try getting that from highfliers like Amgen (Nasdaq: AMGN) that don't pay a dividend.

Second was Abbott Labs, with a 16.5% average annual return.

First place? The stock we love to hate: Altria. Over nearly 50 years, this beleaguered company averaged a 19.8% yearly return. Those extra few points add up -- to a whopping $4.6 million, from an original $1,000 investment!

I still hate Altria, although its spinoff Kraft Foods (NYSE: KFT) is a recommendation in my Income Investor newsletter. But I can't help loving Altria's math -- and aggressively seeking the same kind of returns for my subscribers.

Where can you find a dividend stock that will set you for life?
Remember, Mangum is seeking the same thing. So I perked up when I heard that Bank of America is one of his favorite stocks right now. Why? Bank of America is a current Income Investor recommendation.

Here are some of the reasons why B of A is beloved of newsletter and fund alike:

  1. Bank of America isn't a Wall Street darling right now. That helps, because we don't want hyped, overvalued stocks.
  2. The company absolutely dominates U.S. retail banking. Having a gorilla on your side in a bar fight never hurts.
  3. Bank of America is paying a dividend of more than 7%! You're getting more than half the market's historical average annual return just standing still.
  4. The guys and gals from Charlotte (that's B of A) have a solid balance sheet. They sold off their subprime business a while back (whew!), and credit appears under control.

The qualities that B o A displays are some of the very things I look for when finding stocks for Income Investor. I'd like to share them with you in their more general forms:

  • Attractive price: Saving money isn't just for the grocery store. Paying too much for a stock is a mistake that could take years to erase. At any point, you could buy a great business like General Electric (NYSE: GE), but it's more important to buy a good company at a good price.
  • Dominant market position with a competitive advantage: Why buy the rest when you can buy the best? In good times, industry leaders outdo the industry laggards. And in bad times? They buy them up -- or take their market share.
  • A stable, growing dividend: Want to wind up cash-poor in retirement? If not, buy a company with a dividend that will last -- and grow. As an example, check out Progress Energy (NYSE: PGN), which has increased its dividend for 20 straight years!
  • A quality balance sheet: This should come with the territory for dividend stocks, but sadly, it doesn't always. Don't buy companies carrying more debt than they can handle.

It's really that simple. Of course, there are many more steps, and a lot more time involved, but you can get much of the benefit by keeping those basics in mind.

Stay with solid companies -- companies you understand, possessing understandable finances. A long-term track record and a strong brand helps, too.

I used Capital IQ, an institutional software package, to screen for stocks with $1 billion or more in market cap (my threshold for Income Investor -- too much smaller could mean instability), at least a 3% yield, and a payout ratio of less than 80% of free cash flow. (Net income includes a lot of fuzzy, non-cash events, so I prefer to compare dividends paid to actual cash received.)

Here are three stocks from the screen that you may wish to consider. They're not recommendations per se, but they certainly can be starting points for further research:


Market Cap


Packaging Corp of America (NYSE: PKG)









Where to next in your pursuit of a lifetime dividend stock? I'd first suggest trying some screens yourself, but if you want to skip ahead, you can take a shortcut via a free trial to Income Investor. It has investment ideas, updates, and features to take you down the path to true dividend wealth. The free guest pass is an unbeatable investment.

This article was first published Jan. 7, 2008. It has been updated.

James Early owns no stocks mentioned in this article. Bank of America and Kraft are Income Investor recommendations. The Motley Fool has a disclosure policy.