Income investing carries an unfair stigma.
The conventional wisdom says invest in dividend payers—also known as “widow and orphan” stocks—if you’re just trying to stash your money somewhere. If you actually want to earn a decent return, look somewhere else.
Dividend payers are thought to be stodgy. They’re slow movers. They’re boring. They’ll pay you a few percent a year but won’t move anywhere.
That common wisdom couldn’t be further from the truth.
Take a look at this chart:
Yes, that’s an income investment. In fact, I hold Magellan Midstream (MMP) in one of my High-Yield Investing portfolios. It pays 5% a year. Not too long ago it was paying 7% before the price rose dramatically. Since April 2009, it has returned 128%.
But this isn’t some outlier. You can find dozens of income stocks that have experienced the same thing. A quick screen on Bloomberg shows 193 stocks and funds yielding above 5% that also beat the 71% gain of the S&P 500 during the last two years.
Here’s one of those 193. It’s paying 6.4% in addition to 751% in capital gains during the last two years (the chart below shows the impact of dividends too, which increase the return). It was beaten up in the bear market but rebounded nicely:
Now, I’m not recommending either MMP or Crosstex Energy (XTEX)—but they help prove a point. No, not every dividend-payer is automatically going to beat the market. Some might not even show a positive return.
But the school of thought that says dividend stocks are only a place to park money—and not actually see it beat the market—is simply incorrect.
StreetAuthority’s Dividend Opportunities