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This Tiny Group of Stocks Beat the Market Every Year Since 1972

By Tom Dyson, publisher, The Palm Beach Letter
Monday, August 23, 2010

Every day, when I sit down at work, my job is to find the world's best income opportunities.
 
I've analyzed all the best dividend-paying investments in the stock market... from utilities to REITs. I've even analyzed income investments outside the stock market, like tax-lien certificates, bonds, private companies, and covered-call strategies.
 
Of all the income investments I've researched, I've found one type of stock stands head and shoulders above all others when it comes to generating high investment yields.
 
 
A recent study by Ned Davis Research, the highly respected investment research house, proves me right...
 
According to Ned Davis, this small subset of "high performance" companies outperformed the overall market every year between 1972 and 2008.
 
Take a look...
 
  • Stocks that cut or eliminated their dividends returned average annual gains of -0.3%.
  • Stocks that didn't pay a dividend returned 0.2% per year.
  • The S&P geometric equal-weighted total return index returned 5.9% per year.
  • Stocks that kept paying the same dividends returned 7.6% per year.
  • "High performance" stocks returned 8.6% gains per year.
 
So what are these "high performance" stocks?
 
I'm talking about stocks that relentlessly raise their dividends. Stocks that raise their dividends are far and away the best performers in the stock market, year after year. As Ned Davis showed, they beat every other category.
 
It takes a high-quality business to produce larger dividends every year for many years at a stretch... So the stocks with the longest records of raising dividends tend to be household names like Coca-Cola, McDonald's, Johnson & Johnson, and Wal-Mart.
 
The paradox is, these stocks don't usually have high dividend yields. For example, Coke yields 3%, McDonald's yields 3%, Johnson & Johnson yields 3.7%, and Wal-Mart yields 2%.
 
These low yields disguise the immense "double compounding" power of a rising dividend combined with a strategy of reinvesting dividends each year. Blinded by pure dividend yield, most income investors overlook them.
 
How do stocks with high dividend growth rates generate the highest compound returns, even if they have low current dividend yields?
 
If a stock pays an 8% dividend but never raises its dividend, you'll make 8% a year total returns, assuming the stock price goes nowhere. If you reinvest your dividends, you'll double your money every nine years, again assuming the stock price goes nowhere. Not bad. But consider this:
 
When a stock pays a 2% dividend, but raises its dividend 10% per year – all else being equal – you'll make returns of 12% a year.
 
You see, assuming the dividend yield remains constant, a 10% rising dividend will translate into a 10% rising stock price. Plus you get the 2% dividend, giving you a total return of 12%.
 
All else being equal, a company that yields 2% and grows its dividend 10% a year will double your money every six years. In the short term, this won't always be the case. But over the long term, studies have shown dividend growth and stock price growth have a strong correlation.
 
Finding stocks that raise their dividends every year is easy. Mergent's, the famous financial research firm, publishes a list of stocks called the Mergent's Dividend Achievers Index. Every stock on the list has raised its dividend every year for at least 10 years.
 
Right now, Mergent's Dividend Achiever Index lists 213 companies. You can see the full list of stocks here.
 
Beating the stock market every year is easy. You simply have to buy stocks that raise their dividends and then faithfully reinvest those dividends. It'll be slow and boring at first, but gradually, the dividends grow and your reinvestments increase. One day, you'll open your brokerage statement to find your account has been producing thousands of dollars in dividends a year and your wealth has mushroomed...
 
Good investing,
 
Tom




Further Reading:

Our own value guru, Dan Ferris, recently showed readers that some of the world's best dividend growers are about as cheap as they ever get right now. When these stocks get this cheap, he writes, "the only thing to do is buy them." Learn more, while they're still cheap, here: How to Participate in the World's Best Income Investment Strategy.
 
Earlier this year, Tom highlighted a superstar wealth compounder that has raised its dividend almost every year for the past 40 years... and never cut it. Right now, it yields 7% and growing. With the right strategy, you can double your money even if the stock goes nowhere. Find the details here: Get 7% Dividends from the Most Profitable Stock in American History.

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Netflix (NFLX)… a Peter Lynch stock
Hansen Natural (HANS)… beverages
Salesforce (CRM)… software

NEW LOWS OF NOTE LAST WEEK
 
Bank of America (BAC)… American bank
Wells Fargo (WFC)… Warren Buffett holding
Winnebago (WGO)… recreational vehicles
Rick’s Cabaret (RICK)… gentlemens clubs
Western Digital (WDC)… obsolete hard drives
Hewlett-Packard (HPQ)… CEO troubles
Monster Worldwide (MWW)… job search
Best Buy (BBY)… electronics retailer
DeVry (DV)… secondary education
Corinthian Colleges (COCO)… secondary education
Career Education (CECO)… secondary education
Raytheon (RTN)… defense
Ultra Petroleum (UPL)… natural gas
Range Resources (RRC)… natural gas
Comstock Resources (CRK)… natural gas
Ormat Technologies (ORA)… geothermal energy

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