Every investor wants to know the secret to getting wealthy in the stock market. Many wrongly assume that the secret is to locate the next hot stock and plunge into the shares with all your capital. Indeed, if you catch the right stock, this tactic can and does work. However, the risk factors are simply gigantic. While a few hot stocks do go on to greatness by making their investors very wealthy, the majority simply just languish in mediocracy, slowly decline, or even plunge in value.
Most stock market investors try to mitigate the chances of buying hot stocks that quickly become duds by diversification. It is a time-honored way to protect your portfolio’s downside but allow for the chance for monster winners. Naturally, this makes a lot of sense. However, the downside to diversification is that even the large winning stocks don’t usually have enough of a percentage of your account to create true wealth.
Please don’t misunderstand me! I am a huge proponent of building diversified stock market portfolios for long-term investors. However, there is one element that is crucial for wealth building in the stock market. Many investors forget this single item in their zeal for fast, consistent profits. The reason is that this element is boring. It’s not fun and far from exciting. However, it works!
If you haven’t guessed it yet, I am referencing dividends.
Believe it or not, over 40% of all stock market gains in the last fifty years are attributed to dividends. Just think about that! It means that the Dow Jones Industrials would be trading around 11,000 rather than in the 18,000 area right now if dividends did not exist.
I learned another very cool thing about the power of dividends from Ned Davis Research. If you invested $10,000 in S&P 500 dividend paying stocks in 1972, your portfolio would be worth $226,000 at the start of 2010. If you decided to invest in non-dividend paying S&P 500 stocks, your portfolio would have lost 39% over the same time frame!
The secret to creating long-term wealth in the stock market is to invest in dividend paying stocks then reinvesting the dividend proceeds back into the stock.
Dividend reinvestment takes advantage of the power of compound interest. Albert Einstein is said to have called compound interest the most powerful force on earth. Evidence of this facts abounds from everything from the enormous success of the banking business to watching compound interest work against you by carrying a balance on high-interest credit cards.
How To Choose The Right Stocks For Dividend Reinvestment
It is often wrongly assumed that all one needs to do to find success with dividends is to invest in the highest yielding stocks. The truth is that this can be disastrous to your portfolio. Ultra high yields are often not sustainable and are often the result of a dropping share price.
There are five simple factors to follow when choosing wealth creating dividend stocks for your portfolio.
- Growing dividend payments
- Reliable cash flows
- Positive future forecasts
- Reasonable payout ratio
Dividend-paying companies boasting the above five factors have a high chance to be long-term wealth creators.
A Hated International Dividend Machine You Need To Own
Another secret of successful long-term dividend investors is that they are willing to “think outside the box” when it comes to choosing winning dividend payers.
The two ways these players differentiate themselves from the average investor are the following:
- They look internationally for dividend stocks
The unpopular truth is that nearly 80% of the highest yielding and top performing dividend stocks are located outside of the United States. Savvy dividend investors understand this truth and do not hesitate to invest in international companies.
2. No qualms about investing in hated stocks
Investors often hesitate to invest in the so-called sin stocks or other companies that are widely hated. The public can hate companies for a variety of reasons. It could be anything from a not so moral CEO to an environmental mistake. Whatever the reason, consistently winning dividend investors seek out stocks in a cold, calculated way with little regard to public sentiment. Remember, public opinion can change in a heartbeat, but a real long-term dividend stock can last a lifetime and beyond.
Our favorite dividend stock right now is both an international and hated company.
This international company created one of the worst environmental disasters in the history of the United States. Make no mistake, this was a terrible happening and the company paid dearly for its errors; to the tune of over $40 billion in settlements. The majority of U.S. citizens have very negative feelings about this company. In fact, it has become the poster child for environmental catastrophes.
However, if you are a long-term dividend investor, this company shines brightly!
If you haven’t guessed it yet, I am referencing BP Plc (NYSE:BP).
Today, approximately four years after the disaster, BP has proven itself to be a leading dividend payer, not to mention, a leader in corporate responsibility in its response to the spill.
As you likely know, BP was forced to reduce its dividend in the face of the fines and cleanup costs associated with the Gulf of Mexico oil spill. However, many investors don’t realize at this time; it has been quietly ramping up its dividend payouts. Since the spill, BP’s dividends have increased by an average annual rate of 10.4%.
Despite the 2011 setback, BP has been a steady dividend payer for more than 25 years. Currently, the stock is yielding about 5.8% that makes it nearly three times the present average S&P 500 dividend yield of 1.96%.
A very strong company supports the dividend payout. BP controls one of the globe’s principal oil reserves. To put this into perspective, BP produced 4% of the world’s oil in 2013 primarily thanks to this oil reserve.
BP’s revenue has grown by close to 20% over the past five years. The company’s gigantic economies of scale allow it to weather better the downturn in oil prices than its peers. You see, the larger the firm, the cheaper it is for it to produce oil. BP wins hands down against the competition.
The next huge advantage BP boasts in its sector is the location of its oil reserves. Nearly 50% of the company’s oil is located in the Middle East. The reason this is critical is a function of cost. Oil in the Middle East is by far the least expensive to produce in the world. The latest figures indicate that the per-barrel cost of production of petroleum in the Middle East is less than $20.00. This price is less than half of the cost in Africa or even from offshore rigs.
Adding the slowly bouncing oil prices and it paints a very bullish picture for this hated oil giant.
The Key Takeaway
Dividends are the key to long term wealth building in the stock market. Investing in solid companies have a pattern of increasing dividends is a time proven way to build your portfolio. Savvy dividend investors do not hesitate to look outside of the United States for winning dividend paying stocks. In addition, companies that have a bad reputation with the public are often ignored by investors but may make great dividend producers over time.
Right not the oil company BP plc is our favorite, out of favor, international dividend stock.