Rising Dividends Is the Path to Riches

12/11/2007 12:00 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts & Strategies, says that companies that increase dividends often have the best-performing stocks, and he recommends two ETFs to capture that.

According to the most recent research, dividend-paying stocks outperform non-dividend paying stocks by a wide margin. During the past 35 years, non-dividend paying stocks have gained an average annual return of 2.5%, less than T-bills.

In contrast, dividend-paying stocks have averaged an annual return between 8.9% and 10.9%. That’s a huge difference.

Look at it this way: if you invested exclusively in a diversified portfolio of non-dividend paying stocks (so called “growth” and penny stocks), an investment of $100,000 in 1972 would be worth $240,000 today. Not bad, but not good, either.

If you invested in a diversified portfolio of dividend-paying stocks, your $100,000 would be worth $3,223,000 today. Now that’s worth talking about!

But if you invested in a portfolio of dividend growers and initiators, your $10,000 would be worth $4,059,000 today. Over $4 million! For retirees, you’ve hit the jackpot. Moreover, the growing dividend payers held steady during the long bear market of 2000-03! They didn’t lose money.

Why is this shocking?

First, because most investors and analysts think that dividend payers are stodgy, conservative companies in mature industries that can’t possibly grow rapidly like the technology stocks. According to this traditional view, paying dividends is a sign of weakness—that the company has nothing better to do with its profits than return the money to its shareholders.

Second, most fundamental analysts consider earnings, not dividends, the key indicator of success. Brokers usually tantalize their clients with hot tips about new and bold technology breakthrough stories. Investors often bite. But that is a big mistake. The fact is that most technology “growth” stocks fail to deliver!

Jeremy Siegel, the Wizard of Wharton, calls it the “growth trap” in his book, “The Future for Investors.” He states: “The most innovative companies rarely are the best place for investors.” Why? The reason is that investors invariably overpay for tech stocks.

And Peter Lynch, the legendary money manager of the Fidelity Magellan Fund, confesses, “I note with no particular surprise that my most consistent losers were the technology stocks.” Well, it’s a surprise to me.

Where can one consistently find value in quality companies that are likely to succeed? The answer is simple: buy a portfolio of stocks that pay rising dividends or that will start to pay dividends. There are plenty of them:

1. High dividend US stocks, funds and ETFs
2. High-yielding foreign stocks and funds
3. Rising-dividend stocks and funds
4. High-yielding Dow stocks
5. Business development companies (BDCs)
6. Real estate investment trusts (REITs)
7. Energy and commodity stocks

There are several exchange traded funds (ETFs) that specialize in rising dividends. My favorite is the FirstTrust Morningstar Dividend Leaders Fund (AMEX: FDL), with a dividend yield of 3.6%. I also like the WisdomTree International Top 100 Dividend Fund (NYSEArca: DOO), a great way to diversify internationally and get paid while you wait for stocks to go up.

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