There's a quiet secret on Wall Street that many of the savviest investors have been using for decades to make themselves rich. You might be surprised to find out this secret has been hiding right under your nose in plain sight. I'm talking about high yield stocks that pay you dividends.
Down through the decades, dividends have contributed an enormous 42% to the overall return of the S&P 500. Investing $1000 in 1936 with a strategy of dividend reinvestment would leave you sitting on a nest egg of $1.3 million. Take away the dividends and you would have a mere $79k.
WALL STREET'S BRIGHTEST MINDS SEEK DIVIDENDS
You might have heard of the Oracle of Omaha? At 80 years of age, Warren Buffet runs a $48 billion portfolio chock-full of dividend-paying stocks. One of those stocks in his portfolio is Johnson & Johnson (JNJ). J&J, a household name to most Americans, has fought through 8 bear markets to deliver an unprecedented return of over +9000% since 1977. In 2010 Warren Buffett is expected to capture $90 million in dividends from J&J alone. Think you missed the train on this one? Not according to Buffet who, as of his latest SEC filing, continues to pour millions of dollars into J&J.
But that's Warren Buffett I hear you saying, what does that mean for the common investor? If you took a look at J&J 20 years ago and decided to buy 200 shares, your total investment would have been $13,550. Fast-forward to today and your brokerage account would be brimming with 2,364 shares worth an impressive $139,618 or 10 times your original investment. And better yet, your J&J shares would be paying you over $5k in dividends annually.
Ever hear of a guy named Bill Gates, the co-founder of Microsoft? Of course you have. Together with his wife, The Bill and Melinda Gates Foundation has a trust portfolio worth a staggering $630 million. How many of the stocks in the trust portfolio pay a dividend? Out of the 30 stocks in the portfolio, 24 pay a dividend. Do the math and that's a full 80%. The Bill and Melinda Gates Foundation is expect to earn $22 million in dividends in 2010.
THE CHECK IS IN THE MAIL
What if you could get a dividend check in the mail every month? Better yet, what if you could get a dividend check every single day, month after month? It's entirely possible. All you have to do is load your portfolio with 30 or more stocks that pay you a monthly dividend and bingo, that daily stroll to the mailbox just got a whole lot more exciting. Another advantage of monthly dividends is the amazing effect of compounding interest. Let's say you own a stock that pays a monthly dividend of 1%. Add that up and your earning 12% annually right? Wrong. With dividend reinvestment and compounding interest, your actually making 12.68%. Now who said there's no such thing as a free lunch?
SOME GENERAL RULES OF THE ROAD
1. Dividend Stocks Beat Growth Stocks - With the bear market of 2008, stocks are sitting about where they were a decade ago. A full decade of growth wiped out. Dividend payments are some of the only growth investors saw during that period.
2. Reinvesting Your Dividends is Better Than Cashing Them - Unless you absolutely need it, you should always reinvest your dividends. Your brokerage firm will do it for you automatically. Take a look at what happens to a $20k investment in a stock yielding 7% with dividends reinvested. Throw in a little dividend growth and your sitting on a pretty penny.
3. Small-Caps Beat Large-Caps - A 70 year study encompassing many different equity classes revealed that small-cap companies grew 3 times faster than large-cap companies.
4. International Markets Yield Better Than the U.S. Market - While the average U.S. stock yielded a paltry 2%, international stocks are averaging closer to 5%.
5. Emerging Markets are Beating the Developed World - While the U.S. is struggling to grow it's economy by 1% annually, most emerging markets around the world are growing much faster. China's GDP, the broadest measure of economic output, grew at a annual rate of 9.6% in the third quarter of 2010.
The information provided in this article SHOULD NOT be construed as offering advise. The article is presented as an opinion of the author only. Investing in the stock market has inherent risks involved. As always, due diligence should be exercised before embarking on any investment strategy.