Don't you dream of buying the one great growth stock that
will make you
reallyrich? Wouldn't it have been great to have
bought something like
Green Mountain Coffee Roasters in 1996 (up
9,411%) or
Microsoft in 1988 (up 8,719%)?
Hunting for the next big growth stock can be fun and
profitable, and I'm all in favor of doing that. But when it
comes to retirement investing, I'm also in favor of safer
bets. No, I don't mean dumping everything into money market
funds or anything like that. I mean stocks that give you real
growth you can count on year after year.
Yes, they exist. In fact you probably know lots of them,
although if you're a growth-stock enthusiast you might not
own any.
What's the secret?
Dividends.
Why dull-looking stocks can be really
exciting
Specifically, the secret is to
buy stocks with sustainable dividendsand reinvest them.
Reinvesting dividends means that you instruct your broker,
usually by checking a box on an online form, to use the
dividend payments to buy you more shares instead of just
dropping the cash into a money market fund. And it's one of
the most awesome things you can do in a
long-term portfolio.
Why is that awesome? Because it means even if the market
stinks -- even if it goes through phases where the prices of
the stocks you own are way down -- you're making money. Take
Procter & Gamble (NYSE: PG), the very
definition of a boring blue-chip dividend payer. A decade
ago, at the very height of the 1990s market bubble, P&G
closed at $104.87. As I write this, it closed yesterday at
around $59, but since the stock split 2-to-1 in 2004, that's
not actually a decline -- it's more like a gain of 13% or so.
Better than nothing, but not much to show for over 10
years.
But when we factor in reinvested dividends, the picture
looks a little different -- more like a 40% gain. Again, that
may not seem like a whole lot over 10 years ... until you
remember that P&G is a big component of the S&P 500,
which has fallen by nearly 25% from where it was 10 years ago
today.
Where it gets
reallyawesome
I just did a screen for highly rated stocks paying
outsized dividends and included a few in the chart below.
Just for the sake of comparison, I included the 10-year
returns for each of them. Don't take those too seriously --
past performance is a lousy reason to buy a stock -- but in
this case I wanted to clearly illustrate the power of
reinvested dividends over time. At the bottom of the chart
I've also included a big S&P 500 index fund -- which has
its own yield, made up of the dividend yields of the stocks
in the index -- and its cumulative 10-year performance with
dividends reinvested.
Stock
CAPS Rating (out of 5)
Current Yield
10-Year Total Return
Duke Energy (NYSE: DUK)
****
6%
53%
Enterprise Products Partners (NYSE:
EPD)
*****
7.7%
543%
Altria (NYSE: MO)
****
7.4%
416%
BP Prudhoe Bay Royalty Trust (NYSE:
BPT)
****
8.8%
3,574% Continued... |