In a column last year, we profiled five companies that we called "unbelievably solid." Each of the companies had been paying dividends for more than half a century.

As a refresher, the names were Procter & Gamble (NYSE: PG), 3M (NYSE: MMM), Coca-Cola (NYSE: KO), Johnson & Johnson (NYSE: JNJ), and Johnson Controls (NYSE: JCI).

We stand by that article
Keep those names in mind, because the good folks at Ned Davis Research have given us another reason to like them.

NDR has crunched the returns of S&P 500 stocks going back to 1972, segmenting them by a company's dividend policy. The data shows that over a 38-year time frame, companies that increase or initiate a dividend substantially outperform other types of stocks, and simply annihilate the returns of non-dividend payers:

Monthly data, 1/31/1972 to 9/30/2010. Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to

Yes, you read that correctly. While $100 invested in the average non-dividend payer grew to just $174 over the past 38 years, $100 invested in dividend growers and initiators grew to more than $3,200. With inflation likely, and interest rates low (who wants 1% from CDs and money markets?!), that return potential should get your attention.

So here's our idea
Devote a portion (at least!) of your portfolio to stocks that have a proven track record for raising their dividends, and which appear capable of continuing to do so. This means that they (1) already pay a dividend, (2) have shown a willingness to raise their dividend in the past, and (3) have a free cash flow payout ratio of less than 75%, which means that the company is generating more than enough cash to make it easy for the board to vote "yes" on a dividend increase.

What kinds of companies fit that profile? Take a look:


Current Yield

5-Year Dividend Growth Rate

FCF Payout Ratio (TTM)

Microsoft (Nasdaq: MSFT) 2.4% 6.6% 18.9%
Procter & Gamble 3.0% 11.7% 47.9%
Coca-Cola 2.8% 9.7% 55.2%
3M 2.4% 5.2% 39.6%
Johnson Controls 1.4% 9.5% 46.0%
Johnson & Johnson 3.3% 10.5% 37.5%

Data courtesy of Capital IQ, a division of Standard & Poor's.

As you can see, all five of the "unbelievably solid" stocks fit this profile, and we've added one more promising name to the list. Microsoft, which only started paying a dividend in 2003, has an enormous cash cushion (18.9% payout ratio) to enable future dividend increases.

Microsoft is among our team's portfolio holdings at Million Dollar Portfolio, and on Friday they added another long-haul dividend stalwart (a company that has increased its dividend every single year since 1974).

In these uncertain times, you can do a lot worse than adding the stability and potential outperformance of dividend growers like these. To learn more about Million Dollar Portfolio's lineup of dividend stocks, and to receive our new free report, "Motley Fool Top Picks & Perspectives 2011," enter your email address in the box below: