Markets

3 Rules That Have Led To 15% Per Year Returns... Since 1982

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I probably don't have to tell you this, but the odds are stacked against you when it comes to "beating the market."

By nearly 6 to 1 in fact...

Investment analysts, advisors and fund managers -- the so-called experts -- spend their entire working lives and billions of dollars on research vowing to "beat the market" in any given year -- yet the vast majority of them fail...

Just look at mutual fund industry's record. In the past three years, just 14% of actively-managed mutual fund managers matched or exceeded the market's performance according to Standard & Poor's.

So how are the small minority beating the market?

After years of research, we've found that more often than not, investors who keep these three rules in mind when choosing stocks have been proven to collect higher dividend yields and consistently beat the S&P 500...

1. Dividend payers beat non-dividend payers.

It probably comes as no surprise that, over time, investing in companies that return money to shareholders in the form of dividend payments make a much better investment than putting money in stocks that don't pay dividends.

That's a statement with a lot of history to back it up. A 39-year study from Ned Davis Research found that from 1972 through 2011, members of the S&P that didn't pay dividends returned a measly 2.3% per year, turning a $1,000 investment into just $1,710.

However, companies that paid dividends returned significantly more... 8.6% annually. That's enough to turn the same $1,000 investment into $27,036.

2. Companies that buy back stock outpace the broader market.

But dividends aren't the only way companies reward wealth to their shareholders. Right now, top companies are returning nearly half a trillion dollars to their investors each year by buying back shares of their own stock.

So how do share buybacks reward investors? When a company buys up its own stock, fewer outstanding shares remain and the value of the remaining shares goes up -- even if the company doesn't earn another dime. That makes it much easier for these stocks to rack up impressive gains in a short amount of time.

For proof, look at the PowerShares Buyback Achievers (NYSE: PKW ) . This fund invests in companies that have bought back at least 5% of their shares during the prior 12 months.

And not surprisingly, this fund has nearly doubled the returns of the S&P 500 over the past five years, gaining an astounding 119%.

And that's looking at a broad comparison. Individual companies like Home Depot bought $17 billion worth of its own stock for example, and has gained over 141% just over the past three years.

3. Companies that pay down their debt also beat the market.

Companies that allocate cash to reduce their debt-load make have historically made for safer and higher-yielding investments in the short and long-term.

Paying down debt reduces interest costs, freeing up more capital for other uses... like increasing dividends and buying back shares. It also means the company is generating enough cash flow and doesn't need to depend on borrowing to expand operations, fund R&D efforts, take care of customer needs and run a profitable business.

Firms that pay down their debt burden not only stand a better chance of surviving, but over time they also outperform the broader market.

Between 1982 and 2011, the top 25% of stocks in the S&P ranked by debt pay-down outperformed the S&P by more than 2% per year...

So if dividend-paying stocks beat the market consistently over time...

... and if companies that buy back stock outpace the broader market year after year...

... and if firms that reduce their debt loads also beat the market...

Then what happens when you invest in companies that are returning a small fortune to their investors via dividends, buybacks, and debt paydown?

As it turns out, a tremendous body of new academic research has been done on this topic, and the conclusion is astounding.

Finding stocks that combine dividends, buybacks and debt paydown leads to far greater dividend yields and better total returns over time than using any of these strategies in isolation.

There's even a name we've dubbed for stocks like this -- we call them "Total Yield" Stocks, and they've been proven to crush the S&P 500's performance. In fact, from 1982 through 2011, the top 25% of stocks ranked by their Total Yield returned 15.04% per year -- outperforming the S&P 500 by a wide margin.

P.S. -- I don't have the space to talk about them all here, but you can get names and ticker symbols of several of our top Total Yield Stocks for free in my special research report. To learn more about this breakthrough Total Yield research and get more details on these market-beating stocks, simply watch my research video .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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