Psst -- Here's My Secret Formula

When people meet me and find out that I'm a financial writer, some want to know how I invest. They probably assume that because I'm relatively experienced in stock investing, I've long had some brilliant system in place.

I do indeed have an investing approach I've been honing over the years. And it serves me particularly well these days, now that we investors are enjoying a rare opportunity.

My portfolio combines a few different investing focuses, parking my money in a variety of places:

• A broad-market index fund.
• Promising managed mutual funds.
• (Mostly large-cap) dividend payers.
• Dynamic smaller companies that offer the possibility of rapid growth.

What I really enjoy telling people -- and what isn't evident via a cursory glance -- is that I'm not only putting the power of dividends to work, but also dividend growth and reinvestment.

In fact, my seemingly boring dividend payers might just be my secret weapon. Maybe they should be yours, too. Dividends carry much more power than most investors realize.

The awesome power of dividends
As my colleague Shannon Zimmerman has explained, between January 1926 and December 2006, "41% of the S&P 500's total return was due not to the price appreciation of the stocks in the index, but to the dividends its companies paid out." If you'd invested $10,000 during that period, it would have grown to about a million bucks without dividends … and to more than $24 million with dividends reinvested.

Dividend reinvestment is a beautiful thing, because healthy companies tend to hike their payouts over time. I love that I can pay $30 for a stock today, get a $1 dividend up front, and see that payout rise to $3 or $4 in 10 years, giving me an effective 10% to 13% yield. And all the while, those same shares will (hopefully!) appreciate in price, too.

As Income Investor advisor James Early has explained: "Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!"

James' example reflects dividends reinvested back into the dividend payer's stock. But I often use another approach: Take the dividends as cash, then manually reinvest those dividend dollars into any company in your portfolio. Your proceeds are still reinvested and working for you, but you can park them in the most attractive stocks you find.

Hunting for winners
With their mind-boggling power, dividends are hard to beat. And now is one of the best times to invest in them, since the market's beaten-down stock prices create hefty dividend yields.

I like to see companies with hefty profit margins, because they offer reassurance that a company has pricing power and (probably) brand strength. Strong revenue growth is also a good sign. For my dividend-paying holdings, I also like robust dividend growth rates, since strong growers can give you hefty effective yields over time.

After screening for those criteria, here are seven dividend payers worth a closer look:

Source: MSN Money.

Of course, you should research these further before buying. And if you do take the plunge with a dividend payer, don't forget to put the secret formula to work in your corner, and reinvest those dividends!

If you're looking for a ready-to-go list of recommended dividend payers, I urge you to check out Income Investor, which you can try for free. On average, its picks are beating the market handily, with an average current yield of more than 5%. Click here to learn more about a 30-day free trial.

Already an Income Investor subscriber? Log in at the top of this page.

Longtime Fool contributor Selena Maranjian owns shares Microsoft, which is a Motley Fool Inside Value pick. The Motley Fool is Fools writing for Fools.