After 30 years, the initial 1,000 share stake in XYZ would have grown to 17,449 shares! At the same time, assuming a conservative +8% compounded annual growth rate, those shares would have soared from $10 to more than $100. As a result, the beginning $10,000 investment would have swelled to more than $1.7 million dollars, without ever adding another penny! 

But what would have happened if the investor just pocketed those dividend payments year after year? Well, the stock would still be worth about $100 after 30 years, but without any reinvestment he or she would only be left with the same 1,000 shares, for a total of approximately $100,000. Even when the cumulative dividends paid of $122,346 are included, the entire investment would still only have grown to around $223,000, which is more than $1.5 million less than with dividends reinvested. 

It's also worth pointing out that at the end of the 30-year period, the first portfolio would be generating annual dividend payments in excess of $170,000 ($1.7 M * 0.1). In other words, the investor's annual dividend income alone would amount to more than 17 times his or her initial $10,000 outlay!  

(2.)  Income Stocks Offer More Than Just Solid Dividends

You might ask why should an investor bother buying high-income stocks just to earn a few extra percentage points of return when the bond market offers a safer yield? Well, the answer is deceptively simple. Stock returns are really the product of two elements: dividends and capital gains.

Both bonds and income-oriented stocks can offer attractive yields. However, unlike their fixed-income counterparts, most dividend paying securities also offer decent capital appreciation prospects over time. That means investors are able to not only earn stellar dividend yields, but they can also realize additional gains from rising share prices. Bonds simply cannot match that upside potential. Furthermore, bonds are much more susceptible to interest rate fluctuations, as rising rates can quickly erode the value of their fixed interest payments. 

Income Investing is Now Back in Vogue

After more than a decade of playing second fiddle to capital gains, dividends are back in style. History shows that periods of abnormally large stock market gains are typically followed by extended periods of below-average returns. For example, the huge bull run in the Dow Industrials from the late 1940s to the mid-1960s gave way to a flat market from 1965 to 1980. Over this period, the Dow actually returned less than +1% annually (excluding dividends). This same pattern held true after the 1920s bull run and was also seen in the Japanese Nikkei after its huge advance during the 1980s. After the big run-up we've seen in the past few years, and the subsequent subprime crisis and general economic uncertainty afterwards, we could in for an extended period of uninspiring trading action.
 
One effective way to make money in a flat (or even declining) market is to collect dividends. In the slow growth decade of the 1970s, dividends accounted for nearly 80% of the market's total returns (as opposed to 10% during the 1990s). This strategy holds true because companies that pay dividends tend to have more reliable, stable businesses that hold up better during challenging economic conditions.
After all, to pay dividends over a prolonged period of time, a company must be able to generate dependable earnings. These are exactly the sort of companies that investors turn to for shelter in troubled times.

Each of the securities we'll profile in today's report features yields of 10% or higher -- that is far better than the rates offered by competing money market accounts, CDs, government bonds, or any other typical income securities.

(3.)  What to Look for in a Dividend-Paying Security

While it might be tempting to invest exclusively in the market's highest-yielding securities, this shortcut approach usually leads to mediocre returns. To begin, off-the-charts dividend yields are typically the result of very depressed share prices. In many cases, the companies that offer such high yields are in poor financial shape.

In addition, poorly performing companies often see their share prices decline even further, leading to dismal overall returns. Remember that income stocks offer returns from two sources: dividends and capital gains (or losses). With this in mind, although you can hold a stock that offers an exceptional 15% dividend yield, if the underlying shares lose -20%, then your investment will end up losing money.

Furthermore, most dividends are by no means guaranteed. Companies can reduce their dividend payouts (or eliminate them altogether) whenever they like. As such, a fat dividend yield alone does not guarantee investment success.

With this in mind, we prefer to focus our research on those securities with a proven ability to not only pay dividends year after year, but also to increase their payouts. We also examine a number of other factors to ensure that our investment ideas are fundamentally sound, and look for securities with the best total return potential.

In an effort to determine whether a particular firm can be counted on to pay a sizable dividend plus deliver steady capital appreciation in the coming years, we've established a list of important investing criteria. Before investing in any dividend-paying stock, we carefully evaluate each of the following fundamental factors:

Yield -- A dividend yield indicates the annual return that a security delivers in the form of dividend payments. The yield can be calculated by simply dividing the annual dividend payment per share by the security's current stock price. For instance, let's assume XYZ Corp. is currently offering quarterly dividend payments of $0.50 per share for a total annual distribution of $2.00. Let's also assume XYZ stock is currently trading at a price of $50 per share. In this case, Company XYZ offers an annual dividend yield of 4% ($2.00/$50.00). In an effort to hone in on companies with the most impressive dividend yields, today's report focuses exclusively on securities with yields of 10% or more.

Payout Ratio -- Although we want to earn high returns on our investments, we're also careful to watch for too much of a good thing. A company's dividend payout ratio indicates the percentage of a firm's earnings that management is paying out to shareholders. The payout ratio can be calculated by dividing a stock's annual dividend payment by its annual earnings per share.

The average payout ratio for a component of the S&P 500 Index is around 30%. However, this figure varies greatly from industry to industry. Many high-tech sectors, for example, retain nearly all of their earnings to deploy back in the business. They therefore have very low (or zero) payout ratios. On the other hand, mature, slower-growing industries, such as utilities or banks, often boast payout ratios as high as 70% or more.

Meanwhile, real estate investment trusts (REITs) maintain even larger payout ratios, as they are required by law to return 90% of their earnings to shareholders in the form of dividends. And finally, some companies pay out more than 100% of their earnings to shareholders. In general, we prefer to avoid such firms, as those types of payout ratios almost always prove unsustainable over the long haul.

As a rule of thumb, we generally look for securities with dividend payout ratios below 80%. However, there are certain exceptions to this rule. For example, the payout ratios of securities such as master limited partnerships, Canadian income trusts and shipping firms can seem deceptively high if they are based on earnings instead of available cash flow. That's because these companies typically have very high non-cash depreciation expenses, which reduce earnings but don't affect the cash flow available to shareholders.

Reliability -- Companies are under no legal obligation to continue paying dividends. Therefore, we want to find those that we can count on to maintain and hopefully even increase their quarterly dividend payments. We usually look for companies that have paid consistent dividends for several years. Also, we look for firms with strong track records of increasing those dividend payments. A lengthy history of stable (or rising) dividend payments is often convincing evidence of a company's commitment to its shareholders.

Total Return -- Although dividends are certainly an important part of the picture, they don't represent the whole story. In the end, the total return that a stock delivers is a combination of its dividend yield and capital appreciation. A stock may pay a decent annual dividend, but if its share price declines year after year, then the net effect could be a flat, or possibly even a money-losing investment. Although income investors are typically willing to trade capital gains for the relative safety of predictable income, we prefer to look for stocks that offer the best of both worlds -- rich dividend payments and solid long-term growth potential.

Taxes -- Income investors should always be mindful of the after-tax rate of return they earn on any investment. A stock may pay a solid dividend, and its shares may outperform the market, but if those gains are taxed at a stiff rate, then this may neutralize them. As mentioned earlier, several years ago the tax rate imposed on most dividend distributions was reduced to 15%. One notable exception, however, are real estate investment trusts (REITs). Their distributions are still taxed as ordinary income at rates as high as 35%.

On the other hand, despite the higher tax rate, many REITs still generate after-tax returns that are far superior to other income stocks. Therefore, investors may want to consider shielding REIT dividends and other unqualified dividends by placing those stocks in qualified, tax-advantaged accounts, such as IRAs.

END OF FREE CONTENT

The remainder of this report is available exclusively to our High-Yield Investing subscribers. In it, our research staff provides a table of 10 companies that are now offering dividend yields of 10% or more. In addition, we offer an in-depth look at our four favorite securities from this list. These companies include:

The preferred shares of a mortgage lender whose investments are issued by Fannie Mae and virtually guaranteed by the government. This means its portfolio is secure as can be while investors earn a 10% yield.

One of the first closed-end funds, diversified across the small, mid and large-cap universe and offering a yield of 12.5%.

A shipping stock that is booming thanks to the bull market in oil. Things are so good that it yields an outstanding 14.0%.

Thanks for reading today's special report -- Cash Cows.

Good investing!

-- Research Staff
StreetAuthority.com
http://www.StreetAuthority.com

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