My Big Fat Dividends

If your portfolio's looking a little scrawny, try fattening it up with the portly power of dividends.

Especially when reinvested, dividends can make up a jumbo-sized chunk of the overall return of many stocks. As my colleague Shannon Zimmerman 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."

Chasing chunky yields
The only thing fatter than those gargantuan returns? The yields on the market's most terrifically tubby dividend payers. Sink your teeth into these juicy dividends:

Data: CAPS.Fool.com.

Even if the market weathers lean times, as it did in 2008, if you're invested in solid dividend payers, you'll keep piling on fat and happy rewards.

The key is being picky when you select dividend payers. Don't fall for high yields without doing your research. As noted above, Duke Energy sports a tantalizing yield, but its payout ratio recently topped 100%. That means it wasn't generating enough income to cover its dividend obligation.

Sometimes, high payout ratios are just a temporary glitch; other times, they signal a significant problem with the underlying stock. Either way, they're always worth investigating.

Gargantuan growth
Whether you invest in companies offering yields of 2% or 5%, dividend payers can help your portfolio pack on the pounds -- provided they keep hiking their yields, as most healthy and growing companies do. Here are just a few examples:

Data: CAPS.Fool.com.

These yields aren't eye-popping now, but look how fast they might grow! That sort of steady expansion can turn merely chubby dividends into downright zaftig ones. Growing at 9% annually for 10 years, Coke's 3% yield will become an effective 7% yield, based on your initial purchase price.

I'm loving this effect in my own portfolio. When I bought Johnson & Johnson shares years ago at $43 apiece, my yield was just 1.9%. Now, my effective yield is 4.6% -- while those who buy today are starting out with a 3.1% yield.

Amassing appreciation
Best of all, if you've invested in great companies, you can expect to enjoy long-term stock-price appreciation on top of that dividend growth.

I hope you see by now that dividends are a big, fat, compelling proposition. That's our belief at Motley Fool Income Investor, and our pleasantly pudgy picks are beating the market with an average current yield of more than 4%. With a free, 30-day trial, you can even see which seven stocks our team recommends as "buy first" stocks. Click here to learn more.

Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola, Novartis, and Johnson & Johnson. Coca-Cola, Nokia, and Pfizer are Motley Fool Inside Value selections. Novartis AG is a Global Gains pick. Duke Energy, Johnson & Johnson, and Coca-Cola are Income Investor choices. Motley Fool Options has recommended buying calls on Johnson & Johnson. The Fool's disclosure policy knows how to throw its weight around.