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The Safer Path to Big Bucks

By Selena Maranjian - Updated Nov 11, 2016 at 4:49PM

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Security in a volatile market.

There are lots of ways to make money, to make a lot of it. You could win the lottery, for example. It's a great way to make gobs of greenbacks, but it carries a hefty risk: Odds are, you'll walk away with nothing. You could start a business, alternatively. Huge enterprises such as Hewlett-Packard (NYSE:HPQ) started in garages. Let's face it -- every massive oak tree started from a little acorn. But that's risky, too. Most businesses don't succeed so wildly. Plenty of sprouted acorns wither and die.

Real estate, you say? Well, that can backfire, too. Just ask some people who invested in Texas or California property in recent years. It's not a slam-dunk.

You could invest in CDs at your bank -- they're often competitive with many bonds, but they do tend to lock you in. Last time I checked, even five-year CDs yielded 5% -- quite a bit less than the corporate bond market’s historical returns. As we've noted many times before, for most people, stocks make the most sense as long-term investments. According to research from business professor Jeremy Siegel, stocks outperformed bonds 74% of the time over all five-year periods between 1871 and 2001. Over all 10-year periods in the same span, that figure rises to 82%. Meanwhile, stocks outperformed bonds 95% of the time over all 20-year periods, and 99% of the time over all 30-year periods!

Safe among safe
Still, given the market's recent freefall, it's reasonable for you to find yourself a little skittish at the thought of investing in stocks. Look at these recent performances, after all:

Company

Year-to-date return

Wells Fargo (NYSE:WFC)

(10%)

MasterCard (NYSE:MA)

(35%)

Starbucks (NASDAQ:SBUX)

(56%)

General Electric (NYSE:GE)

(62%)

Data from Morningstar.

You do need to be able to tolerate some volatility if you invest in stocks. And you need to remember that over the long haul, their trend has been up -- healthy companies may swoon for a while, but they will eventually recover.

So, if stocks are the best bet for your long-term dollars, where should you look in the vast stock universe? If you want to have the soundest sleep at night, and invest in companies that will serve you well in a bear market, I suggest dividend-paying stocks. (My colleague Dave Mock has called them "the easiest way to double your returns.")

Dividends are great because as long as the underlying company is on sound footing, you can count on that dividend arriving regularly, whether the stock price is up or down. You'll still get paid. Of course, these companies' stock prices can fall sharply in the short term, as the above examples illustrate. But if you pick the right companies -- more on that later -- prices rise over time -- and so do dividend payments! So, you can reap a double reward over the long haul.

And then there's today's yucky economic environment. Yes, it's a big headache, and many of our investments are in the red these days, but if you have any new money to invest, this is a great time for it. Since dividend yields tend to rise when stock prices fall, Jeremy Siegel found that the market swoon during the Great Depression actually doubled the market’s total returns over a 25-year period.

There are some extra-compelling dividend yields available out there today, particularly among companies that have fallen sharply. For example:

Company

Recent dividend yield

AT&T (NYSE:T)

5.7%

Pfizer (NYSE:PFE)

7.6%

Coca-Cola

3.4%

ConocoPhillips

3.7%

Date from Yahoo! Finance.

These aren't necessarily sleepy outfits, either. Familiar blue-chips can really build your wealth over many years. Coca-Cola stock, for example, increased nearly 12-fold in value over the past 20 years. Pfizer has dropped by more than 25% this year, but despite that, it has still increased some 11-fold in value over the past two decades.

Seeking dividends
So, consider adding some (or many) dividend payers to your portfolio. Don't fall for the fattest yields you find, though -- a fat yield is sometimes attached to a company that has been deservedly punished. And if a company is paying out more than it's earning, well, that's just not sustainable for very long. So be picky. My colleague Anand Chokkavelu offers some tips.

Look at factors other than the dividend, as well. You want healthy, growing companies -- ideally with little to no debt, rising profit margins, respectable revenue and earnings growth rates, and enduring competitive advantages. Such companies offer you the best chances at keeping your capital relatively safe while it grows.  

If you'd like some pointers to promising companies, we'd love to offer them. I invite you to test-drive, for free, our Motley Fool Income Investor newsletter service. Its recommendations have been beating the S&P 500 by several percentage points on average, and those picks sport an average dividend yield of more than 7%. Just click here for a free trial -- it will give you full access to every past issue with no obligation to subscribe.

Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola, Starbucks, and General Electric. Pfizer is a Motley Fool Income Investor recommendation. Starbucks, Pfizer, and Coca-Cola are Motley Fool Inside Value recommendations. Starbucks is a Motley Fool Stock Advisor selection. The Fool owns shares of Starbucks and Pfizer. The Motley Fool is Fools writing for Fools.

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Stocks Mentioned

HP Inc. Stock Quote
HP Inc.
HPQ
$34.31 (-0.55%) $0.19
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$88.35 (-1.17%) $-1.05
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.42 (-0.81%) $0.15
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$46.14 (0.17%) $0.08
General Electric Company Stock Quote
General Electric Company
GE
$79.92 (-1.42%) $-1.15
Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$355.33 (-1.09%) $-3.92
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$49.27 (-1.18%) $0.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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