In terms of popularity, Lady Gaga's got nothing on dividends.
This isn't hyperbole -- according to Google News, "Lady Gaga" has appeared in 15,200 articles over the past month, while "dividends" appeared in 16,800 articles.
Going gaga for dividends
With near-record low interest rates, it's easy to understand why dividends are a hot topic today. As our Foolish colleague Morgan Housel noted here, the dividend yield on the S&P 500 recently moved above the 10-Year Treasury bond yield for the first time in over half a century.
Should this be taken as a sign that investors should go all-in on stocks today? In our opinion, no.
Forgive us, but we're not quick to give an "all clear" to stocks just yet. Yes, there are some tremendous long-term values out there (we'll get to those in a minute), but the economic recovery will likely be slow and could take a number of years to work itself out.
As a result, we prefer to buy dividend-paying stocks slowly and deliberately over time and allow our reinvested dividends to compound. This way, we can keep a decent chunk of cash on the sidelines, just in case the market takes another turn for the worse.
Dividend reinvestment plans (DRIPs) are an excellent vehicle for this approach and it's why Bryan and I (Todd here) brought back the Foolish DRIP portfolio, where we put our own money into the stocks we recommend.
Going gaga for dividend growth
Sure, historically dividends have made up a good chunk of long-term stock returns, but the real sweet spot is finding dividend growers and hanging on for the ride. Below, Todd and I (Bryan here) have teed up five of our favorites, which based on their payout ratio, free cash flow generation and business prospects would be great candidates for a DRIP portfolio.
The duck that will rule the world
In the United States, Aflac
Plumbing for payments pays off
Total System Services
Portfolio and home improvement
With employment and home sales where they are, Lowe's
Dividends with "bling"
Jewelry maker Tiffany
Want some jam with that toast?
With J.M. Smucker's
Foolish bottom line
Remember Fools, slow and steady wins the race. Invest what you can afford to when you're comfortable doing so. Each of these promising companies offers you the opportunity to add small amounts of money into their stocks each month or quarter via their DRIP plans.
Bryan and I (Todd again) will be considering each of these stocks for inclusion in our real-money DRIP portfolio in the coming months. If you'd like to follow our analysis, you can do so on Twitter or by checking our DRIP Portfolio Wiki page.
Todd Wenning owns shares of Procter & Gamble. Bryan Hinmon, CFA doesn't own shares of any company mentioned, but does have a neat collection of arrowheads. Aflac is a Motley Fool Stock Advisor choice. Procter & Gamble is a Motley Fool Income Investor recommendation. The Fool owns shares of and has written covered calls on Procter & Gamble. The Fool owns shares of Lowe's Companies, which is a Motley Fool Inside Value recommendation.
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.
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