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High Yield Dividend Stocks

Unveiling The 'Machine' That's Cranking out Dividends

Written by Brian Hicks
Posted January 30, 2009

By Warren Buffett's own math, matching the gains of the U.S stock market over the last century is going to be quite a tall order.

In his most recent annual report Buffett once again pointed out that in order to equal the gains in the U.S. markets over the 20th Century, the Dow will need to close at roughly the 2,000,000 mark on December 31, 2099!

That means the Dow will need to gain about 1,987,000 points to match the incredible gains in the years known as the American Century.

But seriously, who out there really thinks the Dow will close at the 2 million mark?

Not even Larry Kudlow would sign his name to that one, and he's as bullish as it gets.

After all, we are a full eight years into the new century and we are now actually headed into reverse.

And with that type of performance, we would have to cash in the market equivalent of a Mega-millions ticket to crack the 2 million mark over the next 92 years.

But that begs the obvious question: How can investors match the performance of the last century when it's clear that U.S. equities as a whole are not up to the challenge?

The answer is two-fold.

1. They need to be genius-level stock pickers over the long haul, which is exceedingly tough for most retail investors. Or...

2. They need to juice their returns with the dividends of income stocks. That's because as every seasoned dividend player knows, income investing guarantees you a head start in every market.

That makes the 5.3% compounded annual growth rate of the last century much more achievable. It's the dividends that make the difference!

But that doesn't mean by any stretch of the imagination that these income-generating stocks are only suited for the "retiree crowd."

Truth is... dividend-paying stocks should be a part of every well-balanced portfolio-especially in today's markets. Young, old, or in between.

Here's why.

Even in bear markets, dividend-paying stocks typically do well, especially if those companies have a strong history of increasing the dividend payout.

That's because investors win two ways when a company increases its dividend. First, the yield on your initial investment goes up with the dividend, and even better, the dividend increase often propels the share price higher.

That's an unbeatable combination in today's tough markets. That's why investors are so eager today to gobble up high dividend yields.

So What is Dividend Yield?

Dividend yield is simply your rate of return from the dividend payouts, exclusive of any stock price appreciation. It's calculated by dividing the dividends you receive over a year's time by the price you paid for the stock.

For example, your dividend yield is 5% if you paid $20 per share, and you receive $1 per share in dividends ($1/$20) over the 12 months following your purchase.

Dividend yield, however, is not a fixed number. It changes along with the share price. For instance, say someone else buys the same stock a week later when the share price had moved up to $25. Instead of 5%, their dividend yield would only be 4% ($1/$25).

In short, it is a cash payout that you receive for simply being a shareholder, sort of like receiving a bonus based on a company's earnings.

Moreover, these "bonuses" also offer lower tax rates than similar investments in savings, CDs or money market accounts. Thanks to a change in the tax law, dividends are now taxed at only 15%. That's considerably better than the 35%+ taxation levied against ordinary income.

The Surefire "Dividend Money Machine"

Picking successful dividend paying stocks, however, is not as simple as buying only the stocks with the highest yield. In fact, it is usually the stocks with the highest yields that often trip up investors the most.

Instead, picking winning dividend stocks usually requires finding candidates with two qualities.

#1 — They should have a minimal risk of a dividend cut.

#2 — There should be a high probability that the dividends will increase while you own the stock.

Those two factors, of course, are exactly what makes dividend-paying healthcare stocks so attractive these days.

That's because if there is one area of the economy that is bulletproof in regards to a recession, inflation, or worse stagflation, it has to be healthcare.

And when you add the prospect of 78 million graying baby boomers to the mix, the prospects for these types of investments is practically a no-brainer.

In fact, according to recent projections by the federal government, consumers and taxpayers will spend more than $4 trillion on healthcare by 2017 as our population continues to age.

The result is that healthcare spending will increase by 6.7% annually over the next nine years, outpacing inflation by nearly three times according to the forecast. In fact, it is estimated that by 2017 healthcare spending will cost an estimated $13,101 per person vs. today's average cost of $7,026 per person.

That, needless to say, will provide the type of environment that will keep those dividends growing, right along with the stocks in your portfolio.

Here's the Best Part: You Make Money

You see, you don't exactly need to be a mutual fund star to beat the markets with these dividend payers. In fact, the truth is that you need to be just opposite — you need to be something of a lazy investor.

That's no typo. You really can accomplish more with dividend stocks in the long run by actually doing less. So don't believe for a moment that buy and hold investing is dead. Not by a long shot.

Of course, successful dividend investors themselves have known this for years and have been banking big gains because of it. That's why the truly rich don't spend their days glued to the financial news watching Joe Kernan and Becky Quick. They're too smart for that.

They realize that while most investors think trading is where the action is, investing in high-yielding income stocks is just as rewarding provided you do nothing but accept the checks they send you.

Sure, it's lazy... but it works.

The name of the game, after all, is that profit and income stocks are like clock work — even in down markets.

So don't let Mr. Buffett's market math discourage you from investing in the markets. His point after all was that this century's markets were going to be a bit different from the last. Beating them is going to take some different strategies.

That is why these "Dividend Money Machines" are looking pretty good these days for investors looking to build wealth with few risks.

After all, if you're already booking a 7% or better dividend with your investments, you're beginning the race with a pretty big head start.

Your yield-loving analyst,

steve sig

Steve Christ, Investment Director

The Wealth Advisory

PS. If gains like 81%, 56%, 55% and 53% sounds appealing to you, than a subscription the Wealth Advisory may be just what your portfolio needs.

As part of your subscription, you will receive my 5-stock "Dividend Money Machine" that can send you on your way to wealth. It's a mix of dividend stocks and municipal bond funds that pay income ranging from 6.23% to 9.14%.

That's hard to top in these markets.

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