Home Value Investing Reliable Dividends Are Boring, Safe…And Extremely Profitable

Reliable Dividends Are Boring, Safe…And Extremely Profitable

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There’s glamour in making money that others don’t know about.

Isn’t there?

But don’t worry. Whatever I tell you here is strictly within the legal boundaries of your country.

Introducing the Man Who Knew The Secret of Making Big Money

Don’t take my word for it. The guy who claimed “I have ways of making money that you know nothing of” is the richest man in human history.

In today’s dollar terms, this guy is worth more than 700 Billion Dollars. Almost 12 times the richest man today.

I have ways of making money that you know nothing of

Who better to have said this than American business tycoon John D. Rockefeller, founder of American Oil Behemoth: Standard Oil.

And just to convince you that Rockefeller knew what he was talking about, Standard Oil was the largest oil company that ever existed. It controlled more than 95% of the American oil industry at its peak. Then due to court rulings against business monopolies, Standard Oil was broken up into seven smaller companies. And one of the seven “smaller” companies went on to become Exxon Mobil Corporation (NYSE:XOM).

Oh, if you didn’t know, Exxon is the largest enterprise in the world today.

Don’t forget to toss in the other “small” one called Chevron too.

But what on earth was Rockefeller talking about?

Rockefeller’s Secret Love for Dividends

According to official records and his business sense, Rockefeller was referring to dividends.

In 1896, he gave up control of day-to-day operations but held on to his shares of Standard Oil and the dividends. Since he was the majority owner, he ensured that the company paid out more than 2/3 of its profits as dividends.

For the next forty years until his death, he kept collecting dividend checks and enjoyed the steady capital appreciation of the stock.

Rockefeller got Rich off Shares of Standard Oil

He once remarked:

Do you know the only thing that gives me pleasure?
It’s to see my dividends coming in.

That’s right. Rockefeller was a dividend investor.

How Can You Use This Secret?

So how can you use Mr Rockefeller’s secret to become extremely rich?

Tip #1: Guard yourself against people’s opinion about dividend investing.

Almost everyone in the stock market is programmed to make quick money. Very few have the patience to follow the correct process that ensures riches in the stock market.

Believe me, even though waiting around and collecting dividends sounds simple, I bet you it isn’t easy to follow.

Tip #2: Reliable dividends come from companies with predictable revenue streams

Here’s a famous and technically reliable strategy of making money in stock markets with dividend paying stocks – The Dogs of the Dow Strategy.

The strategy is simple.

On the first day of the year, select 10 stocks with the highest dividend yields from the Dow Jones Industrial Average (INDEXDJX:.DJI). The Dow Jones is made up of 30 stocks.

The table below shows the top 10 stocks (by current dividend yield) from Dogs of the Dow list. You can get the latest list from here.

Rank Company Name(Part of Dogs of Dow) Current Dividend Yield (%)
1 AT&T 5.23%
2 Verizon 4.31%
3 Merck 3.52%
4 Intel 3.47%
5 Pfizer 3.40%
6 McDonald’s 3.34%
7 Chevron 3.20%
8 General Electric 3.14%
9 Cisco Systems 3.03%
10 Microsoft 2.99%
  1. Hold these ten Dogs of the Dow for one year
  2. Sell the losers before the year end to take advantage of tax losses
  3. Sell the winners the very next year to pay long term capital gains
  4. Buy the top 10 Dogs of the Dow again and repeat

This strategy has beaten the index over the long run with low risk and you can sleep soundly at night.

Dogs of the Dow Performance

Another Strategy You Can Start Using Today

Here’s another way of profiting off dividends.

This strategy is a combination of Warren Buffett’s policy of “being greedy when others are fearful” and the Dogs of the Dow Theory. To carry out this strategy and meet high returns, follow these steps.

  1. Identify rock solid and dependable businesses. Generally companies that have been part of the DJIA index or Dogs of the Dow for at least 10 years
  2. Based on your findings from step 1, shortlist the candidates that paid decent and reasonable dividends during years of turmoil and downturns
  3. Continue building your cash reserve and wait for the next stock market crash because it will come sooner or later

(This step is painful because it could be years before the market crashes. Your money could be stuck in a low interest yielding account. But don’t worry. You will win in step 4 below.)

4. When the markets crash and you are convinced that valuations are low (using indicators like Shiller P/E, P/BV etc), load up the truck on the candidates from step 2

By following this strategy, you pick up great companies at dirt cheap prices. These companies have strong balance sheets to survive the downturn and will reap the benefits of in the next economic up cycle.

Even in a horrible market, people all over the world will continue to line up to buy McDonald’s burgers and fries.

The Upside of this Hybrid Value + Dogs of the Dow Strategy

The best part happens when the economy begins to turn around for the good.

The companies you chose may have stopped their dividends during difficult periods, but when the economy gets better, the dividends will come back or increase.

Ultimately, your dividend yield-on cost becomes very attractive because you bought the stocks at such a cheap price.

Take a look at this example. It’d help you better understand this wealth generation secret.

Intel (INTC) Example

Let’s say you found Intel Corporation (NASDAQ:INTC) from steps 1 and 2 mentioned above.

Now if you were regularly saving money until 2008 to buy high quality and yielding dividend stocks, 2008 was a great time to buy Intel.

At the end of 2008, the stock price was close to $13.

You feel that it’s a good time to invest as the market is severely undervaluing its long term potential. Also the stock price is down 60% from the highs of 2008.

If you bought Intel at $13, over the next one year (2009), Intel paid $0.56 in dividends. This amounts to a yield of 4.3% on the stock.

Not bad. Isn’t it?

Fast Forward to 2013. The share price hits a high of $26 which is double the buy price.

More importantly, Intel increased its quarterly dividend and paid out $0.92 per share in 2013. That’s a yield of 3.5% based on the $26 price.

But based on the purchase price of $13, the yield is 7.1%.

And that is one hellava yield on a stock that has doubled in price.


Yield on cost grows from 4.3% to 7.1% | Click to Enlarge

Isn’t this great? Of course it is.

Rockefeller understood the power of dividends and for such a savvy businessman, he was delighted in holding his shares.

Take this time-tested secret from a billionaire and use it to work wonders for your long term wealth creation.

This post was first published at old school value.

You can read the original blog post here The Richest Man in History Reveals His Simple Wealth Generating Secret.

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