The Startling Truth About Dividend Stocks

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The startling truth about dividend stocks is this: Their performance destroys that of their nondividend-paying brethren. It's as simple as that. In two paragraphs, I'll prove this to you, and then conclude with three dividend stocks you can use to start profiting from this lucrative reality.

Proof that dividend stocks dominate
Let's start with a look at the most recent year. As of today, the S&P 500 ETF (NYS: SPY) , an exchange-traded fund that tracks the performance of the S&P 500, returned 2.6% over the past 52 weeks. The SPDR S&P Dividend ETF (NYS: SDY) , an exchange-traded fund that tracks the performance of S&P's Dividend Aristocrats, returned 7.8% over the same time period, a full 5.2 percentage points better. Moreover, the latter ETF emphasizes some of the oldest and most established (i.e., boring) corporations in America such as Procter & Gamble, Coca-Cola, and McDonald's -- certainly not what you'd think of as highfliers.

To ensure this recent performance isn't a fluke, let's follow Fool analyst Morgan Housel's lead and look further back in time. According to Morgan's calculations, $1,000 invested in the S&P 500 in 1957 was worth $176,000 in 2006. The same $1,000 invested in the top 10 S&P companies with the highest dividend yields grew to $1.3 million. In other words, you would have made more than seven times the amount by choosing dividend stocks over the broader market. Even more counterintuitive was Morgan's demonstration that stocks with the highest dividend payout also have the highest average P/E ratio. Indeed, famed Wharton finance professor Jeremy Siegel goes so far as to say: "It's black and white; stocks with higher dividend yields have given better total returns with actually lower risk for the shareholders."

Drink the dividend Kool-Aid
As the preceding paragraphs demonstrate, there's simply no argument that dividend stocks aren't on average the best place to stash your extra cash. So where should you start? My recommendation is to build a dividend beachhead with tobacco companies Lorillard (NYS: LO) , Reynolds American (NYS: RAI) , and Altria Group (NYS: MO) . They all have dividend yields of 4.5% or more, captive customers, and strong brand recognition. They also happen to have a history of producing strong share price appreciation. Last year, for instance, the three posted total returns of 46%, 34%, and 28%, respectively.

For more ideas on great dividend stocks, check our free report about 11 rock-solid dividend stocks that investors can use to shore up their future with fat quarterly dividend checks. To get your free copy while it's still available, click here now.

At the time this article was published Fool contributor John Maxfield has no financial position in any of the securities mentioned in this article. The Motley Fool owns shares of Altria Group and has sold shares of SPDR S&P 500 short. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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