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22 noviembre 2006

The Path to Dividends

Because dividend-paying stocks are often viewed as safer investments, the common perception is that they tend to underperform non-payers in heated markets. While this was true during the Internet-driven craze of the late '90s, it hasn't held true for other periods.

The S&P 500 index jumped from about 100 points to 1,250 points -- more than a 1,000% increase -- from 1980 through 2005. That's a hefty bull market. And during that time, dividend payers outperformed non-payers by more than 2.6 percentage points per year. While that may not sound like much, if you'd invested $10,000 in dividend-paying stocks in 1980, today you'd have nearly $300,000 -- which is $120,000 more than your dividend-shunning neighbor.

So how can you find great dividend stocks yourself? It's not based on yield alone. If that were the case, we'd all be holding declining businesses like General Motors or companies with questionable management teams like American Italian Pasta (NYSE: PLB). A high yield is not always a good yield. Indeed, some of the highest-yielding stocks -- like the two mentioned -- exist only because their prices have dropped through the floor.