The Worst Investment in 50 Years

It isn't every day that you're able to lock in a decade's worth of below-inflation, market-lagging returns. Nor would you want to, right?

You'd think. But like moths to a flame, shaken investors the world over are piling into two of the most blatantly poor long-run investment opportunities of our lifetime: cash and U.S. Treasuries. If you're thinking of selling out of the market and socking your dough in the bank or a trusty Treasury, I beg you to reconsider.

Here's why
Now more than ever, we don't know what we don't know about the market's future. But there are a few things we do know.

• Last year was the worst for the U.S. stock market since 1937.
• The dividend yield on the S&P 500 is at 3.0% -- in the realm of a 16-year high.
• The benchmark 10-year U.S. Treasury bond, meanwhile, currently yields 2.38% -- near a 50-year low.

That's right: The dividend yield on the S&P 500 now exceeds that of the 10-year Treasury bond. Based on data I've collected, this is the first time this has happened in at least 20 years. And here's something else we know: The stock market tends to boom for seven years following a period when dividend yields are high, according to the University of Chicago's John Cochrane.

Do the math
Prices are down. Yields are up. Rates are low. Look, it doesn't take a market guru to see the opportunity here. For the long-run investor, the stock market is stupid cheap right now. Former highfliers Google (NASDAQ:GOOG) and PotashCorp (NYSE:POT), both of which sport meaningful competitive advantages, have been beaten down to the point that even this curmudgeonly investor is kicking their tires. Meanwhile, staid dividend payers from Yum! Brands (NYSE:YUM) to Chevron (NYSE:CVX) sit like fish in a barrel for the long-term investor.

Indeed, these beaten-down dividend dealers have caught my interest for two reasons. First, because you're currently able to gobble up blue-ribbon stocks at flea market prices. And second, because dividend-paying stocks offer the best of both worlds: Not only are they less volatile, but according to Dr. Jeremy Siegel, portfolios invested in the highest-yielding S&P 500 stocks outperformed portfolios in the lowest-yielding by almost five percentage points a year from 1957 through 2003.

Dividends ... on steroids
But despite the obvious potential for long-run investors right now, investors shockingly continue to flock to mattress-yielding Treasuries and money-market accounts. To the fear-stricken investor who has been crushed this past year, the 0.6% higher yield the S&P 500 offers above the 10-year Treasury isn't all that impressive.

If you spread that 0.6% across 10 years, though, the cumulative difference is massive. That difference is magnified even further when you start looking at individual blue chips.

Let's compare how these results shake out over a 10-year period. Take a gander at the last column:

Yield data as of Jan. 4, 2009.

If you put your money in the 10-year Treasury right now, you'd earn a cumulative 23.8% on your investment -- the worst return you'd get on those bonds in 50 years. If you roll the S&P 500 route, however, your payback from dividend checks is likely to be at least 1.3 times higher over the same period. Income Investor core recommendation Paychex? Twice the return of the 10-year.

Incredibly, that's the conservative scenario. When you buy a bond and hold it to maturity, you're stuck with that same subpar yield for the entirety of your purchase. With blue-chip dividend payers, though, you can count on your dividends to rise at a fairly steady clip each year.

Let's look at these same returns, only assuming the S&P 500 and the other blue chippers on this list are able to grow their dividends at just one-third of their growth over the past five years.

Yield data as of Jan. 4, 2009.

By factoring in some conservative dividend growth assumptions, the relative returns on dividend-paying stocks practically explode. Paychex's expected cash return against the 10-year Treasury, for example, rises 40% to nearly triple that of the bond.

But here's the kicker: The returns on those stocks assumes no capital gains whatsoever.

After having watched the market fall 34% in a year, are we really to believe that shares of first-rate stocks won't rise over the next decade? If you truly believe they won't, I suggest selling your stocks and investing in a shotgun, seeds, and some canned goods.  

It really is that simple
So, let's sum all this up:

• Most signs point to this being an outstanding time to be buying stocks.
• The common alternatives to holding stocks -- cash and Treasuries -- are yielding far less than their dividend-paying peers.
• Dividend-paying stocks vastly outperform non-dividend payers over the long haul.

To me, all signs point to blue chip dividend payers right now. That's why I've been loading up on them in my personal portfolio -- including Paychex. And that's also why James Early and I are practically salivating over at Income Investor, the Fool's market-beating dividend-focused newsletter service. Our members gain access to our top dividend-paying stock ideas, weekly company updates, and a new research report and stock idea each month. You can kick the tires on us and our service free for 30 days.

Joe Magyer owns shares of Paychex, which is a recommendation of both Inside Value and Income Investor. Joe does not own shares of any other companies mentioned in this article. Google is a Rule Breakers recommendation, Coca-Cola is an Inside Value recommendation, and Kraft is an Income Investor recommendation. The Motley Fool has a disclosure policy.