A few weeks ago, a 1909 T206 Honus Wagner baseball card sold at a Chicago auction for a cool $1.62 million. With fewer than a hundred Wagner cards estimated to be in existence, big press coverage ensues whenever one goes on sale. Last year, a near-mint version of the card was sold for $2.8 million!
Every baseball fan (including yours truly) would love to have one in their collection, but, in the end, it's just a piece of paper with a picture on it. See, a Honus Wagner card can't generate income while you hold it, and it's only worth as much as someone else is willing to pay for it.
That reminds me ...
When you get down to brass tacks, non-dividend-paying stocks share similar qualities to the Wagner card. In lieu of dividend payments, investors bank solely on capital appreciation to generate returns -- in other words, their stocks are only worth as much as someone else is willing to pay for them.
Of course, it is hard to resist the temptation of sexy growth stocks like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). On the other hand, dividend-paying stocks provide investors with more options when it comes to returning shareholder value. Not only do they contain the capital appreciation element of non-dividend-paying stocks, but they also periodically return a percentage of profits to shareholders in the form of cold hard cash.
That cash can then be used to invest in another stock, save for a rainy day, or buy a new pair of shoes. Try taking your old Pets.com certificate to the shoe store and see how far it will get you...
Go on autopilot
If you believe in the future of the company, an even better option is to reinvest the dividend back in the stock and acquire more shares. Not only does this take the guessing game out of knowing when to add new money, but over time it can greatly augment your returns.
Consider the difference in returns for investors in these companies, assuming the first purchase was made on Aug. 15, 1998.
|
Company |
Return w/ Reinvested Dividends |
No Reinvested Dividends |
|---|---|---|
|
Kellogg |
141% |
82% |
|
IBM (NYSE:IBM) |
124% |
105% |
|
Apache (NYSE:APA) |
1,043% |
965% |
|
Tupperware |
134% |
51% |
|
Qualcomm (NASDAQ:QCOM) |
1,740% |
1,514% |
|
Johnson & Johnson (NYSE:JNJ) |
127% |
89% |
*Source: Company websites.
Reinvesting dividends even just over a 10-year period can make a huge difference to your bottom line -- for Qualcomm investors it meant an additional 226% return! Moreover, reinvestment increases share count so whenever you decide to receive your dividends in cash form, you'll command a larger dividend than you would have otherwise. For example, Tupperware investors who chose to reinvest own 50% more shares than they would have had by just taking the cash.
A bird in the hand
Having a portion of your portfolio dedicated to dividend-paying stocks not only provides you with more options, but they can also boost your returns, reduce overall risk, and build steady income streams for retirement. Regardless of your age, they're simply the stocks you must own.
But not all dividend payers are created equal. Among other things, you should look for stocks with:
- Top market position in its sector
- Sustained history of dividend growth
- Clear, defensible competitive advantage
- Experienced management
- Sufficient dividend coverage
Some ideas for you
If I were to pick a diversified group of five such stocks to fill out a core dividend-paying portfolio on these criteria, it would look something like this:
|
Company |
Dividend Yield |
Payout Ratio |
Industry |
|---|---|---|---|
|
Johnson & Johnson |
2.6% |
42% |
Health care |
|
Chevron |
3% |
25% |
Energy |
|
Southern Co. |
4.4% |
71% |
Utilities |
|
Philip Morris International |
3.3% |
55%* |
Consumer Goods |
|
Wells Fargo (NYSE:WFC) |
4.7% |
57% |
Financials |
|
Average |
3.6% |
50% |
* 2008 estimated
This group of stocks provides you with a diversified stream of dividend income for years to come, and I'm confident it will deliver decent earnings growth to boot.
If you don't agree with my picks (hey, not everyone likes tobacco companies) or are looking for different ideas, we're offering a free 30-day trial to Motley Fool Income Investor where co-advisors James Early and Andy Cross find the best dividend payers on the market. To date, their picks are outperforming the market by seven percentage points on average. To see their full list of stocks as well as their best buys right now, click here. You'll be glad you did.
Todd Wenning 's favorite baseball card is a signed Donruss 1989 Ken Griffey, Jr. rookie card. And no, it's not for sale, White Sox fans. He owns shares of Philip Morris International but of no other company mentioned. Tupperware Brands, Southern Co., and Johnson & Johnson are Motley Fool Income Investor picks. Google is a Motley Fool Rule Breakers recommendation. Apple is a Stock Advisor pick. Nothing can stop the Fool's disclosure policy.
