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A Roadmap to Build Wealth Through Dividend Stocks

Most investors aren't very good at investing. I suspect over their lifetimes, most investors will end up losing money in the stock market. So why do they keep coming back, and is there anything that can be done to turn the losses into gains?

The formula for success in the market is relatively simple. Buy low, sell high. So why do so many people do so poorly? It seems they are doing the exact opposite of what they should be doing.

Byran Harris, a senior editor at Dimensional Fund Advisors, put together an analysis that showed many investors in 2008 and 2009 "fled equities during the worst months of the global financial crisis, while others waited for signs of a turnaround before investing more. Their emotional reactions may have exacted a large price on their wealth." Investors during this period sold over $266 billion of U.S. equity mutual funds.

Following their emotions, investors will significantly under-perform a mutual fund by jumping in and out of it. A University of Nebraska study confirmed this by examining the the timing of mutual fund investors. The study found that between 1991–2004 the average active fund investor substantially underperformed the growth of a dollar invested in the fund over the entire measurement period.

If we can't trust our emotions, how can we succeed in the stock market and still sleep at night? Here is how to do it...

Stop Watching the Daily Market Gyrations

If horror movies scare you and you don't want to be scared, stop watching horror movies. In the same vein, if listening to the main stream media watching the stock market daily causes you to do foolish things, stop listening and watching.

Look at the sponsors of financial/market news shows. It is brokers and others with a vested interest in people trading. The more you trade the more commissions brokers earn. When the market is going up, these shows appeal to your greed and desire to not "miss out," and when the market is going down the appeal is to your fear of "losing it all."

This behavior is the exact opposite of the path followed by successful investors. As Warren Buffett so aptly stated, investors should be "fearful when others are greedy and to be greedy only when others are fearful."

So how do you build the confidence to put this in practice?

Adopt A Winning Investment Strategy

You are probably thinking, "Duh, that's easier said than done." My response, "not really." Winning investment strategies are laying out there in front of everyone; they are well documented and proven. I have selected dividend growth stocks as my vehicle to success.

Ned Davis Research found that between 1972 and 2006, S&P 500 stocks that consistently increased their dividends returned 10.4% total (dividends and share price appreciation), while those that did not increase their dividends returned only 8.2%.

In "Triumph of the Optimists: 101 Years of Global Investment Returns (2002)," the authors looked at equity returns from capital gains and dividends from 1900 to 2000. They determined that performance in any given year was driven by capital appreciation, but long-term returns were largely the result of reinvested dividends. Looking at 101 years of data in the U.S. and UK, they found that a market-oriented portfolio with dividends reinvested would have generated nearly 85 times the wealth of the same portfolio relying solely on capital gains.

According to Jeremy J. Siegel, if an investor had put $1,000 in a portfolio of the 100 highest-yielding S&P 500 stocks on Jan. 1, 1957, by Dec. 1, 2009, he would have accumulated more than $450,000 (assuming all dividends were reinvested). That’s a hefty annualized return of 12.5%, an average of almost 2.5 percentage points per year greater than the return on the S&P index.

Convinced? For your consideration, here some dividend growth stocks with a rich history of growing their dividends:

Dividend Growth Stocks

McDonald's Corporation (NYSE:MCD) | Yield: 2.7%

- Years of Consecutive Dividend Growth: 35

- Dividends Consistently Paid Since: 1976

McDonald's Corporation is the largest fast-food restaurant company in the world, with about 32,900 restaurants in 117 countries.

Pepsico Inc. (NYSE:PEP) | Yield: 3.2%

- Years of Consecutive Dividend Growth: 39

- Dividends Consistently Paid Since: 1952

PepsiCo Inc. is a major international producer of branded beverage and snack food products.

Abbott Laboratories (NYSE:ABT) | Yield: 3.5%

- Years of Consecutive Dividend Growth: 39

- Dividends Consistently Paid Since: 1926

Abbott Laboratories is a diversified life science company that is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics. In mid-October 2011, Abbott announced plans to split the company.

Target Corporation (NYSE:TGT) | Yield: 2.1%

- Years of Consecutive Dividend Growth: 44

- Dividends Consistently Paid Since: 1965

Target Corp. operates about 1,500 Target and 250 SuperTarget general merchandise stores across the U.S.

Colgate-Palmolive (NYSE:CL) | Yield: 2.6%

- Years of Consecutive Dividend Growth: 48

- Dividends Consistently Paid Since: 1895

Colgate-Palmolive Company (Colgate) is a major consumer products company that markets oral, personal and household care and pet nutrition products in more than 200 countries and territories.

Coca-Cola Company (NYSE:KO) | Yield: 2.8%

- Years of Consecutive Dividend Growth: 49

- Dividends Consistently Paid Since: 1893

The Coca-Cola Company is the world's largest soft drink company, and it also has a sizable fruit juice business.

Johnson & Johnson (NYSE:JNJ) | Yield: 3.5%

- Years of Consecutive Dividend Growth: 49

- Dividends Consistently Paid Since: 1944

Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.

3M Company (NYSE:MMM) | Yield: 2.7%

- Years of Consecutive Dividend Growth: 53

- Dividends Consistently Paid Since: 1916

3M Co. provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives and other chemical additives.

Procter & Gamble (NYSE:PG) | Yield: 3.3%

- Years of Consecutive Dividend Growth: 55

- Dividends Consistently Paid Since: 1891

The Procter & Gamble Company is a leading consumer products company that markets household and personal care products in more than 180 countries.

Emerson Electric Co. (NYSE:EMR) | Yield: 3.2%

- Years of Consecutive Dividend Growth: 56

- Dividends Consistently Paid Since: 1947

Emerson Electric Co. designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial, and consumer markets around the world.

To succeed in investing you must first adopt a winning strategy and be totally confident in the strategy. So confident that you can't be swayed by the naysayers, including friends, family and the media. It takes time to build this level of confidence. Then again, it takes time to build lasting wealth.

Full Disclosure: Long MCD, PEP, ABT, TGT, CL, KO, JNJ, MMM, PG, EMR . See a list of all my dividend growth holdings here.

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- How To Buy Dividend Stocks At The Bottom

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Rating: 3.8/5 (12 votes)


Batbeer2 premium member - 5 years ago
Hi Dividends4life

Thanks for the article.

>> Ned Davis Research found that between 1972 and 2006, S&P 500 stocks that consistently increased their dividends returned 10.4% total (dividends and share price appreciation), while those that did not increase their dividends returned only 8.2%.

Presumably, companies that raised their dividends did so because:

A) The business was profitable and growing (prosperous).


B) Management chose to return some of the profit to shareholders in the form of cash dividends.

The rest were either less profitable (Enron, Kodak, Ashland) or chose to retain earnings (Berkshire, Leucadia, DJCO....).

In short, this research proves a subset of prosperous businesses outperformed the market.

Two questions:

1) How is an investor to know beforehand which businesses will prosper ?

2) Do you know of any research that compares the subset of prosperous businesses that distribute earnings to the subset of prosperous businesses that retain their earnings ?

Please leave your comment:

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