Back to Main

Your Most Important Investing Decision of the Next 10 Years

By: Carla Pasternak
Posted: 2/6/2012 8:30:00 AM
Referenced Stocks: EPR;ETP;RAI;SUI;UTG

Think of where you'd be right now if you'd made this move 10 years ago.

The S&P 500 is up only 41% during that time (a 3.5% average annual gain). Meanwhile, Reynolds American (NYSE: RAI ) is up 403% during the same span. Energy Transfer Partners (NYSE: ETP ) has returned 664%. Entertainment Properties Trust (NYSE: EPR ) is showing a return of 356%.

And these are some of the most boring companies you can think of -- real-state investment trusts (REITs), pipeline operators and cigarette makers. But they all have one thing in common.

They pay solid dividends.

As the chief investment strategist behind High-Yield Investing , I'm biased. But I think dividends are the most powerful tool in investing. You don't have to take my word for it. Other investors agree:

"I have made more money in retirement than I did when I was working. Income from dividend-paying stocks (which I collect every month) is even better than my greatest expectations."

- High-Yield Investing subscriber, William B.

Even John D. Rockefeller once quipped that the only thing that gave him pleasure was to see his dividend coming in.

The simple fact is that how you treat the dividend -- often the forgotten step-child among investors -- is the most important investing decision you'll make today... in the next year... even the next decade.

Let me show you what I mean.

Take two portfolios, each worth $100,000. The first one earns 8% in capital gains each year. The second one earns half that amount in capital gains -- only 4% each year -- but earns a 6% dividend that's reinvested.

I chose these numbers as they illustrate a choice investors can be faced with -- invest in a faster-growing stock that doesn't pay a cent in dividends, or earn a nice yield and see slower growth. Here's the best news -- you'll end up earning more with the dividend, and typically have fewer ups and downs as you would with a riskier growth stock.

In fact, in 10 years your portfolio would be worth $265,089 if you went with the dividend-paying holdings, compared with $215,892 with the growth-only portfolio.

During a longer period, the difference is more dramatic.

Wait 20 years and your dividend portfolio would be worth more than $702,000 compared with $466,096 -- a difference of more than $200,000.

And here's the best part. The misconception is that dividend payers are boring, stodgy securities. They might pay a few percent, but they won't grow enough to really make a difference.

That couldn't be further from the truth...

• Shares of Sun Communities (NYSE: SUI ) yield 6.1%, but they've returned 623% since the March 2009 market low.

• During the same time, the Reaves Utility Income Fund (AMEX: UTG ) has returned 364%, while paying monthly dividends that now equal a 5.5% yield.

• And the NuveenReal Estate Income Fund (AMEX: JRS ) has returned 459% in addition to its 8.2% yield.

But that's during a strong market rally, and coming off of multi-year lows. What about in different conditions?

• Terra Nitrogen (NYSE: TNH ) is paying 7.1% and has a total of return of 100% during the past year (a time when the S&P 500 is up only 4%).

• Altria (NYSE: MO ) , which pays a 5.8% dividend yield , has returned 28% in the past year.


That's not to say every dividend payer will be a big winner. It won't be, and I wouldn't listen to anyone who says they can guarantee a stock's gains.

Action to Take --> But in the sizzle of the mainstream financial media, it's the fast-moving names like Apple (Nasdaq: AAPL ) and Google (Nasdaq: GOOG ) that get most of the headlines. As you can see, it may just be the dividend-payers that are most important to your success.

-- Carla Pasternak

Carla Pasternak does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of SUI, GOOG in one or more if its "real money" portfolios.