There's a common misconception among investors that dividend-paying stocks cannot, by definition, also be great growth stocks.

But in fact, stock price appreciation and dividend growth can go hand in hand quite well, as we'll see shortly.

Spread the wealth
Too many investors assume that since dividend-paying companies pay a percentage of profits to shareholders in the form of cash, there's less left over for them to reinvest in their own businesses, resulting in slower earnings growth.

But there's such a thing as a company having too much cash -- and that's not only true of value stocks. Some large-cap growth companies -- such as Dell (NASDAQ:DELL) and eBay (NASDAQ:EBAY), for example -- are sitting on billions in cash, but don't give any of it back to shareholders in the form of dividends.

Investors in these stocks are putting all of their faith in management's ability to do more with that cash than they themselves could. Will Dell and eBay management consistently invest that cash into projects returning more than you could earn elsewhere? Possibly -- but with both stocks down more than 50% over the past few years, you really have to wonder if just a little of that cash wouldn't have been better off in your pocket.

In fact, as a 2003 study by Robert Arnott and Clifford Asness showed, there's a link between higher dividend payouts and higher earnings growth. See, companies paying a dividend naturally have less cash available -- and that forces management to be more selective with the projects they take on.

On the other hand, as Arnott and Asness note in their study, managers who are flush with cash too often try to "empire build" -- and make ill-advised acquisitions or take on pie-in-the-sky internal projects that never quite materialize.

For my money, I'd much rather have the companies I own run by managers who are forced to spend only on the very best of their available projects.

The best dividend-paying stocks
The best dividend-paying stocks, in other words, provide not only income, but significant capital appreciation. By way of example, consider the tremendous performance of Wal-Mart (NYSE:WMT) -- which in addition to nearly unmatched returns for early investors has raised its dividend every year since 1974, when it was still a small-cap company.

But is Wal-Mart the exception to the rule? I looked for the best dividend-paying stocks of the last decade using the following criteria:

  • Capitalized above $100 million on Dec. 31, 1998.
  • Listed on a major US exchange.
  • Paid a dividend each year.
  • Never cut its dividend during the decade.
  • Increased its dividend at least once.


Dividend-Adjusted Return,

10-Year Annualized
Dividend Growth




Agnico-Eagle Mines (NYSE:AEM)



Occidental Petroleum (NYSE:OXY)



CH Robinson Worldwide



Teva Pharmaceutical



EOG Resources



Corporate Office Properties Trust



Tanger Factory Outlet Centers



Potash Corp. of Saskatchewan (NYSE:POT)



Apco Argentina



Data provided by Capital IQ, a division of Standard & Poor’s, and Yahoo! Finance.

Wal-Mart may be the best example of the growth power of dividends, but it's clearly not the only one.

The next dividend winner
So what do the best dividend payers of the next decade look like? Here are some noted trends from the companies above.

  • Unsurprisingly, all of the companies were small- to mid-caps in December 1998, which allowed plenty of room for price appreciation.
  • With the obvious exception of the real estate investment trusts (REITs) on the list, the payout ratios (dividends per share / earnings per share) were generally below 50%, which allowed plenty of room for dividend growth.
  • The rate of dividend growth generally remained below earnings growth, a sign that the company is not only conservative with its dividend growth (too much too soon can backfire), but that it also sees opportunities to reinvest in the business.
  • While many industries were represented, energy-related companies were the most common. In late 1998, many energy companies were beaten down as investors preferred "new tech" dot-coms (boy, was that a mistake), but energy nevertheless enjoyed economic tailwinds and a wide-market opportunity for growth. Selecting an undervalued but promising dividend star in a similarly positioned industry will significantly improve your odds of finding a winner.

One stock that fits this profile is waste management company Republic Services, a stock our Motley Fool Income Investor team recently named a "featured buy." It's a mid-cap at $4.5 billion in a growing and necessary industry, and its low payout ratio, near-monopoly status, and ability to rake in cash mean there's also the potential for serious dividend growth.

Get the best of both worlds
As the best dividend stocks of the past decade show us, you should never feel as though you need to trade dividend growth for earnings growth. That's why James Early and the Income Investor team not only look for companies with well-protected and growing dividends, but the potential for long-term earnings growth as well.

If you'd like to learn more about the stocks our Income Investor team is looking for in this market, a free 30-day trial to the service is yours. There's no obligation to subscribe, so to get started today, just click here.

Todd Wenning does not own shares of any company mentioned. eBay is a Motley Fool Stock Advisor pick. Dell, eBay, and Wal-Mart are Inside Value choices. The Fool's disclosure policy rules Fooldom.