How to Earn Above-Average Yields with Below-Average Risk

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Dividend Investing

The dot-com boom and bust was monumental for a lot of reasons. Not only was $7.1 trillion worth of market capitalizations lost, it shifted the way investors view stocks and their portfolios.

During the bull market of the late 1990s, trading stocks became the national past time. CNBC’s market coverage more closely resembled ESPN’s Sportscenter than serious business programming.

Stock trading was a sport filled with the thrill of victory and the agony of defeat.

Starting in early 2000, that agony became very real for many investors.

By October 2002, millions of people were left wondering how they’d ever bring their decimated portfolios back to a level where they could someday retire.

Not surprisingly, investors were gun shy for a while. Many didn’t get back into stocks until the bull market was well underway, only to get their heads handed to them again during the financial crisis of 2008.

Then came a three-year bull market (that few believed in), where the S&P 500 doubled in two years.

The Ghosts of the Dot-Com Bust

Despite (or perhaps because of) the extreme moves in the market over the past decade or so, investors seem to have kept their short-term focus.

After the markets barely budged over the past 10 years, the financial media pronounced “buy and hold” dead. Perhaps still high on the adrenalin rush from owning shares of Pets.com, investors no longer seem to view owning stocks as a vehicle to achieve financial security. Instead, they’re using them mostly for short-term profits.

Now, there’s nothing wrong with short-term profits.

But, for those that want stocks to generate income and/or wealth over the long term – which is the way most investors have historically used the market – dividend stocks are the way to go. Specifically, those companies that are growing their dividend every year.

Perpetual Income No Matter What

At investor conferences over the past few months, I’ve been giving a presentation called, “The Only Investing Strategy You’ll Ever Need.” I call it that because when you invest according to the way I talk about in the discussion, you should make money – lots of it – no matter what happens in the stock market or even in your particular stock.

The key is to buy stocks that pay a healthy and stable dividend, where the dividend is rising at a strong rate each and every year.

I call these stocks “Perpetual Dividend Raisers.” These are the companies with track records of annual dividend boosts.

For example, Intel (Nasdaq: INTC) has an eight-year track record of dividend hikes.  Automatic Data Processing (NYSE: ADP) has boosted its dividend for thirty-seven consecutive years. And Genuine Parts (NYSE: GPC) has raised its dividend every year since 1956!

Investing in these types of companies is critical for maintaining or improving your standard of living.

If you’re retired now and need the income generated by your dividend stocks, you must see dividend increases every year.

Because let me show what happens if you don’t get a boost…

Inflation has averaged 3.4% since 1914. If over the next 10 years, inflation comes in at the historical average, what costs you $1,000 today is going to cost $1,397 in 10 years. If your investments aren’t raising their dividend, you’re going to have 28% less buying power than you have today.

Even if we remain in a low-interest and inflation environment like we’ve had over the past decade, you’ll still need $1,250 to buy the same amount of goods and services that $1,000 buys today.

And if inflation picks up and is slightly ahead of the historical average – look out.

Even at a not too alarming 4% inflation rate, in 10 years you’ll need $1,480 to buy $1,000 worth of goods today. That’s nearly 50% more!

How to Earn a 10% Yield

This is why it’s critical that the majority of your income portfolio isn’t just paying a nice yield today. But that the income is safe and growing. Unless, as you get older, you plan on having a lower standard of living, growing that income year-after-year is key.

Luckily, you don’t have to take on a lot of risk in order to achieve that growth.

For example, Genuine Parts raised its dividend by over 10% last year. Clorox’s (NYSE: CLX) most recent dividend raise was 9.5%. Over the past decade, the dividend has been boosted by an average of 10.6% annually. And Williams Partners (NYSE: WPZ) has raised its dividend an average of 12.6% per year over the past five years.

Using this strategy, with the stocks I’ve mentioned above, they should deliver yields of 10% or more within 10 years of your first share purchase –not including reinvested dividends. If you reinvest the dividends, the yield on your original purchase will be even higher.

To make real and lasting money in the stock market, Perpetual Dividend Raisers are the best strategy in my opinion. History shows that these stocks perform better than the broad market, are less risky and can generate significant income and create wealth.

These stocks are such a powerful tool, that I’m using them to set my kids up for college and beyond.

I don’t think there’s a more meaningful endorsement than that.