Money Matters - Simplified


Excavating Dividends in Israel

Rumor has it that at one of Jerusalem's excavation sites, archeologists recently discovered piles of coins from thousands of years ago. The prevailing theory is these are dividends that were paid on stock from the Mesopotamia stock exchange.

3 Stocks That Are Automatic Wealth Machines

When you invested that grand, you would have had just 29 shares at the price of $34.50. Hardly enough to get on with, right? Well, today, through splits and spinoffs, you would have:

  • 700 shares of Altria.
  • Nearly 500 shares of Kraft.
  • 700 shares of Philip Morris International.

Total value? Just shy of $62,000. Better yet, you'd have earned a total of $30,000 in dividends as a result of that original $1,000 investment.

What if you had reinvested those dividends? Instead of nearly 1,900 shares across three companies worth a total of $62,000, you'd have more than 7,100 shares of three companies worth a whopping $235,000. That includes more than $82,000 in dividend payments -- nearly three times the income received by those who chose not to reinvest dividends.

But here's the really sweet part. Today, without having to sell a single share, you'd be receiving nearly $12,000 in income -- every year.

Now that's what I call a wealth machine.

Yeah, right!
All right, I know what you're thinking. "That is such a blatant example of data mining! Nobody did that!" Well, as it happens, my grandmother did. Not with Altria, but with ExxonMobil (NYSE: XOM).

She bought shares of Exxon back in the early 1960s and reinvested her dividends. By the time my grandfather was ready to retire some 30 years later, they were able to buy two lots of land and build their retirement home on one of them -- paying cash on the barrelhead just from that one investment.

In other words, Altria is by no means the only example in which reinvesting dividends could have made you rich over the years.

Want further proof?

Professor Jeremy Siegel of the Wharton School of Business has shown that the 100 highest-yielding stocks of the S&P 500 outperformed the overall index by three percentage points per year. Now a three-point advantage may not sound like much, but over 10 years, that meant more than $900 more received for every $1,000 invested.

Wealth machines
Now before you can say, "Where am I going to find companies that even come close to what happened way back then?" let's look at what makes a "wealth machine."

I call Altria and ExxonMobil wealth machines not because they were great companies (although they were) or because they paid a dividend -- after all, not every dividend payer can be called a wealth machine -- but because they consistently raised their dividends. And they were able to do that because they performed consistently well.

What may surprise you is that research by Robert Arnott of Research Affiliates and Clifford Asness of AQR Capital Management has shown that companies with higher dividend payout ratios -- the amount of the dividend compared to net income -- tend to have higher real earnings growth in the following 10-year period. In other words, they're better-run companies. And we already know what earnings growth means for a company as far as price goes.

So that's what to look for: companies that consistently raise dividends over time. Now let's look at some numbers.

Would you believe me if I told you that 20% of the companies currently in the S&P 500 have increased their dividend by 10% or more per year over the past 10 years? It's true. In fact, fully 104 companies have done so.

That list includes such familiar names as Wal-Mart Stores (NYSE: WMT), at 24.7% per year over the past decade, and PepsiCo (NYSE: PEP), growing dividends at a slower, but still healthy, 12.7% per year.

Here are three other wealth machines -- and what you would have today if you had invested in them 10 years ago, reinvesting all dividends.


Average Annual
Dividend Increase

Result of Investing $1,000

Including  Dividends

XTO Energy (NYSE: XTO)




Occidental Petroleum (NYSE: OXY)




Nike (NYSE: NKE)




Source: Capital IQ, a division of Standard & Poor's.
CAGR = compounded annual growth rate.

An 18.7%-per-year return comes close to rivaling Warren Buffett's performance -- and you don't even have to be as smart as he is. All you have to be is smart enough to invest in well-run companies with a history of paying dividends and increasing those payments over time.

© 2010 UCLICK L.L.C.

The Easiest Way to Become a Millionaire

Sure, there might be folks who got rich by finding companies like Chipotle Mexican Grill (NYSE: CMG) when they were small caps, then selling when their market caps grew larger than $2 billion.

You Missed the Bottom. Now What?

"As stock markets slid in March, Judy Brady lay awake at night thinking about her portfolio. 'My retired friends who had all CDs and gold, and they were still making money, and my investments just kept going and going,' she said. 'I thought: I can't afford to lose all this.' So the 70-year-old retiree in Schaumburg, Ill., sold most of her stocks."  -- The Wall Street Journal, May 18, 2009

Dividends for 100 Years

In this crazy world, it's hard to find things you can count on. Death and taxes, sure. Jobs, marriages, even your favorite breakfast cereal? Not so much. But there's another, more positive element you usually can rely on: Dividends.

These Dividends Are Done

It's been a scary crisis for dividend investors.

5 Unbelievably Solid Companies

Quick test: Which of the following is false?

My Big Fat Dividends

If your portfolio's looking a little scrawny, try fattening it up with the portly power of dividends.

Does a Home Improvement Retailer Fit Your Portfolio?

Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) have been navigating a bleak environment created by the housing hangover. Unlike homebuilders Hovnanian (NYSE: HOV) and Standard Pacific (NYSE: SPF), these companies stayed clear of the cliff's edge, generating positive annual earnings and steady dividends. Fortunately for Home Depot and Lowe's, toilets back up, and roofs leak, creating repairs that can't be postponed -- definitely or indefinitely -- the way a home purchase can.

Expect More of This in 2010

Some of the biggest casualties during last year's bear market were dividend-paying stocks. After more than a year of seeing many companies slash dividend payments, it now appears that there's light at the end of the tunnel.