Let Dividends Help You Crush the Market

Writing for SmartMoney, the always-sharp Jason Zweig presented what has to be the easiest way to beat the market using dividends. All you have to do is invest in dividend-paying stocks and then completely ignore the impact of dividends on your benchmark.

In his article, Zweig names some names, and I'm guessing it had to be pretty painful to be on the receiving end of that data-gotcha pantsing. But I won't repeat the names here because, frankly, I was nearly taken by the same thing when writing this article a month ago.

I think it's a fairly easy issue to overlook because on a day-to-day basis we talk constantly about the S&P 500 index -- the very measure that Zweig highlights as taking no account of dividends. Rare is the day when you hear anybody mention the S&P 500 Total Returns, which is the measure that does take dividends into account.

As I've pointed out on a few occasions, until recently I think people had simply begun to look at dividends as outmoded -- a thing of the past like silent movies and leisure suits.

But I've continued to pound the table on exactly why investors shouldn't be ignoring the power of dividends, and the table below shows what I believe is one of the most interesting "convincers" of all. The data below correspond to the returns for all U.S.-listed stocks with a market cap above $500 million as of January 2000 for the period January 2000 to January 2011.

Source: Capital IQ, a Standard & Poor's company.

Ready for the part that will really blow your mind? That is stock price change alone -- it does not include the impact of dividends on the returns. So even without considering the cash rolling in from dividend payments, dividend investors still beat everyone else over the past 11 years.

Not only are there plenty of stocks available to choose from today with a dividend yield of 3% or better, but there are some really great stocks that fit this description. Here are just a few.

Source: Standard & Poor's and Yahoo! Finance.

Why these companies in particular? Because not only do they all have dividend yields in excess of 3%, but they're all on S&P's Dividend Aristocrats list, which means they've not only paid, but also increased their dividend for at least 25 consecutive years.

The bottom line here is if you're trying to calculate whether your portfolio is beating the market or you're trying to construct a market-beating portfolio, do not overlook dividends.

For more dividend ideas, check out The Motley Fool's free report featuring 13 high-yielding dividend stocks.