Get Rich Slowly

The Tortoise Beats the Hare Every Time...

Written by Jimmy Mengel
Posted July 1, 2013

Why is everyone hating on dividends?

For the last few years, all we've heard is "dividends, dividends, dividends" — and for good reason...

When QE was rocking at full force, dividend stocks were one of few safe havens for investors craving yield. In fact, over half of the stocks on the S&P were yielding more than the pitiful 1.8% that Treasury bonds returned.

Investors were flocking into REITs, MLPs, royalty trusts, and basically anything that gave them a steady income flow.

But it seems the tables have turned. Treasury rates have quickly jumped to 2.66%, which is taking the wind out of dividend stocks' sails. The average return on S&P dividend paying stocks weighs in at 2.5%.

And since Bernanke hinted at the tapering of his bond-buying spree back in May, the single worst performing sector has been high-yielding utilities, down 10%. Based on yield alone, this has cut the number of S&P dividend stocks outpacing Treasuries almost in half. 

From Bespoke Investments:

bespoke dividend yield chart

While some are wailing at the death of the dividend, I see plenty of buying opportunities within that 33%.

A common mistake made by dividend-drunk investors is to simply look to stocks that pay out the highest dividend. This is a shortsighted and dangerous way to invest.

What you should be looking for is a pattern of dividend hikes over a long period of time.

The dividend "aristocrats" are those blue chip companies that have managed to raise their dividend payments every year, for at least 25 years in a row.

So today let's take a look at some of these high-flying dividend stocks from a few different industries...

Billionaires Agree...

This is one that both Warren Buffett and Bill Gates agree on: Procter and Gamble (NYSE: PG) is a forever stock. Buffett's Berkshire Hathaway holds a $4.26 billion position in PG, while Gates holds over 100,000 shares.

Procter and Gamble is a consumer product titan that employs around 126,000 people. And if you shave, shower, and brush your teeth (which we'd like to think you do), you almost certainly have some Procter and Gamble products in your home...

PG owns Gillette razor, the most popular razor in the world, Head and Shoulders shampoo, and Crest toothpaste, as well as Pampers diapers and Iams pet food.

PG's 3.1% dividend beats a Treasury any day of the week, and its foray into emerging markets like Brazil make it a strong candidate for growth going forward.

The company is now trading at the low end of its historical P/E ratio, and sports an annual average earnings growth of 6.5% over the past decade.

Low Prices, Big Dividends

Love it or hate it, there is no denying the power of Wal-Mart's (NYSE: WMT) business plan: sell stuff for way less than the other guys. "Always."

It's worked like gangbusters over the last 30 years and, as a result, Wal-Marts are springing up faster than a klutz in a cactus patch.

And the retail king's revenue keeps climbing:

wal mart png

WMT pays out 2.5% dividends, and has raised dividend payments each and every year since they introduced it in 1974.

Like Procter and Gamble, Wal-Mart is also a favorite of Warren Buffett, with Berkshire Hathaway holding near $4 billion worth of their stock.

Last month WMT touched 52-week highs close to $80 a share, so it may be wise to wait for a drop under $70 before adding it to your long-term portfolio.

Our very own Brian Hicks has uncovered a clever way to collect monthly payments on Wal-Mart's real estate holdings. Read more of the details on that program here.

A Boring Way to Get Rich

As I mentioned, utility stocks have been battered most, down 10% since the first sign of tapering.

Utility stocks are well known as one of the most "boring" investment you can own — which is precisely why they are a great long-term dividend play. You can find some of the highest yield in big-time utility companies.

Enter Duke Energy (NYSE: DUK), the largest electric company in the United States. They are up 94% over the last decade:

DUK Chart

DUK sports a 4.7% dividend, well beyond the return on a Treasury. And while Duke hasn't raised their dividend every year, they have been offering one for the past 87 years. Not too shabby.

Given the exodus from dividend stocks (and utilities especially), you may be able to secure a much lower entry price by waiting a couple of months. So keep them on your radar.

Drip, Drip, Drip

First things first, we don't recommend buying a stock solely on the dividend. We like to buy sturdy companies with strong upward potential — especially when we can utilize a dividend reinvestment program (DRIP) to effortlessly add to our holdings (and typically at a nice little discount!)...

Here's a list of companies that have fee-free DRIP programs.

So it's a bit of a false choice to put dividend stocks against Treasury bonds.

While you are guaranteed to secure the 2.6% return from Treasuries, you are also guaranteed to not make one cent more.

With dividend aristocrats, however, you are guaranteed at least the dividend payout, while you can bank on the stock appreciating and the dividends being raised year after year.

And if you take the extra step to start a DRIP, those gains will keep compounding. So before you know it, you'll own a mighty stake in a bona fide growth company that will keep paying you long after your little Treasury bonds are dead and gone.

Which sounds better to you?

Jimmy Mengel

Jimmy Mengel for Outsider Club

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