Dear fellow investor, Rewind to fall 2021. My wife Jean and I had just closed on the sale of one of our rental properties in Washington, DC, followed by a second several months later. I was eager to invest our newly available cash but was struggling to find opportunities I was truly excited about. If you’re a longtime Fool, you know I was a big-time proponent of growth investing, having worked years directly alongside The Motley Fool co-founder and growth investing guru David Gardner in U.S. services like Rule Breakers and Supernova. With newfound cash to deploy, you’d expect growth stocks would be the first place I’d look. But here’s the thing… Years of monetary and fiscal stimulus combined with historically low yields had sent asset prices soaring.

Stocks yes, but also bonds… real estate… heck, even art and collectibles. You name it… all over North America!

Not to mention “investments” that even many veteran analysts could barely comprehend like cryptocurrencies and NFTs. Remember, this was toward the end of 2021, when the market was at its frothiest and right before the U.S. Fed really started hammering it with rate hikes. Basically everything felt like it was trading at unsustainable valuations. Frankly, I had the feeling we’d reached the peak of a market cycle. And were due for a reckoning. Perhaps because I’d recently turned 40 and become a father, I also felt a serious need for capital preservation in a way that I’d never felt before. Jean and I had put years of sweat equity into our rental properties, and I shuddered at the possibility of seeing the wealth we’d worked so hard to build evaporate overnight. I was no longer interested in swinging for the fences with every single one of our investments. I wanted less risk. I wanted less volatility.

Above all, I wanted income.

Stable, ever-growing streams of income. As an investment analyst here at the Fool since 2008, I’d obviously known about dividend-paying stocks and real estate investment trusts for quite some time. Even owned quite a few. But as I started to immerse myself in the idea of investing specifically for income, I discovered just how incredible dividend-paying stocks have historically performed vs. your average stock. With far less volatility to boot. Over time, it’s extraordinary what that can do for compounding your wealth. Case in point, have a look at this chart.

Chart refers to U.S. market.

As you can see, a $10,000 investment in the U.S. S&P 500 Index would have grown to $795,823 by 2021. Not bad, right? That’s 79X your money over 60 years. But look what happens when you add reinvested dividends back into the equation… Instead of a little over three quarters of a million dollars, you’re looking at nearly five million dollars. $4,949,663 to be precise, good for 495X your initial $10,000 investment.

Not to mention a whopping $4,153,840 MORE than you would have had by not reinvesting your dividends!

That’s a life-altering outcome, my friend. $4,000,000 represents a nest egg that could set your family up for generations to come. Especially if you’d kept it invested in dividend stocks to continue racking up that income. In fact, let’s do a little quick math… Even if you got paid a relatively moderate 3% in dividends on that $4,000,000 nest egg, you’d be spitting out $120,000/year in income. For doing nothing. Here’s how that looks over just 10 years.

After just a decade’s worth of time, you’d have already generated upwards $1,000,000 in pure cash income. And remember, not only does that not include however much the prices of the shares you’re holding goes up… But as the overall value of the shares theoretically grows, you’d earn even more cash income from the dividends.

All it takes is one small decision, and you would have set your family up for generations to come.

Which is precisely what I decided to do when I implemented this strategy back in early 2022, converting a significant portion of my primary brokerage account to dividend-paying and — this is important — dividend-growing companies. It paid off. Big time. In 2022, that portfolio fell 7.9%. I know, I know. “Matt, have you lost your marbles?” But let’s put it into context. Losing 7.9% of your portfolio looks a lot more impressive when you compare it to the U.S. S&P 500, which fell nearly 20%. And it’s downright amazing when you contrast it with the Nasdaq, which plunged more than 32%. Yep, the tech- and growth-heavy Nasdaq had roughly a third of its value sliced off in a single year. Meanwhile, I took the impressive amount of dividend income I was harvesting and reinvested it at bargain basement prices as the bear market took its toll on the shares. Effectively, I was getting more and more shares of companies I already loved at cheaper and cheaper prices! And while I saw other investors sweating or even full-on panicking from the beating that was going on day in and day out in the market for the entirety of the year, I was able to sleep soundly. After all, I knew that outside of the financial crisis, dividend stocks had outperformed non-dividend payers in every recession over the past 50 years.

Chart refers to U.S. market.

On top of that, they outperformed with less volatility in the process. (I’ll explain why that’s so important straight ahead.) This probably sounds strange coming from a former U.S. Rule Breakers and Supernova go-go growth analyst, but dividend yield will be a core component of what I look for in a company going forward. Simply put: it will be extremely tough for me to find stocks I personally want to invest in that do NOT pay a dividend. The benefits are simply too powerful, not to mention too obvious. Have a look at this table…

Chart refers to U.S. market.

The first thing you’ll notice is just the stark difference in annual returns between Dividend Payers and Dividend Non-Payers. 9.6% for Dividend Payers vs. just 4.79% for Dividend Non-Payers. Right off the bat, you’ve cut your returns in half if you’ve avoided dividend stocks over the past 50 or so years. HALF. But better returns usually means more volatility, right? Think again. If you aren’t aware, volatility in the stock market is referred to as “Beta.” A Beta of 1 is perfectly average market volatility. Anything below 1 is less volatility than the overall market. Anything above 1 is more volatility. And as you can see from the above table, which I’ll toss up again for your convenience, Dividend Payers not only have double the average returns of Dividend Non-Payers… They have far lower Beta as well! Again, let’s look at the table…

Chart refers to U.S. market.

That’s .94 (lower volatility than market average) vs. 1.18 (higher volatility than the market average). Higher returns. Lower volatility. What’s not to love? Even better, these same dynamics prove true in Canada, too, with our research showing the Canadian Dividend Index posted higher returns AND experienced lower volatility than non-dividend payers over the last 40 years!

That said, we do need to address this notion that all dividend stocks are precisely the same…

A lot of us are guilty of thinking of dividends as binary, right? Companies either pay them or they don’t. But we actually need to get a little more granular than that when we think about dividends. You may have already noticed in the table above that I had Dividend Payers broken into three sub-categories: Dividend Growers/Initiators, No Change in Dividend Policy, and Dividend Cutters/Eliminators. Pretty self-explanatory. But this table really highlights the differences between these various types of Dividend Payers.

Chart refers to U.S. market.

As you can see, Dividend Growers are incredibly powerful. Highest average returns at 10.68%, with the lowest Beta at just .88. And it makes sense that they’d be so successful, right? After all, by increasing their dividend, they’re saying they’re generating so much cash they have plenty to spare, so let’s give even more back to our shareholders. These are the kind of companies we really want to focus on. On the opposite side of the spectrum, look at Dividend Cutters. Not only is their Beta the highest at 1.22 (even above stocks that pay no dividend), but they actually produce NEGATIVE average returns at -.46%. That’s horrid. Much like we want to be all-in on Dividend Growers in our hunt for great dividend stocks, we generally want to avoid Dividend Cutters at all costs.

Over the long term, refusing to keenly focus on what may seem like marginal decisions at the time can cost you big.

Here’s how big.

Chart refers to U.S. market.

If you’d put just $100 into the U.S. S&P 500 with no regard for dividends whatsoever back in 1973, by 2021 you’d have $4,744, for a 47X return. Hey, that’s not bad, right? But what if you’d said, “Okay, I know dividends are important. I’m putting my lone Benjamin into dividend stocks exclusively.” Right off the bat, you’d already pumped up your output to $8,942 — an 89X return, and roughly double that 47X return from generic U.S. S&P 500 stocks.

But what if you already knew about the absolute power of Dividend Growers, and decided that’s where you wanted to invest?

By 2021, your simple $100 bill would have grown to $14,405. That’s 144X your initial investment, and 3.5X the return from the U.S. S&P 500 Index. On the other hand, look how Dividend Cutters performed. Incomprehensibly, you’d be receiving a paltry $80 back from that initial $100 outlay. (I wouldn’t want to compare that to inflation!) Not to mention — give me a second while I break out my calculator for this one — just 1/180th the final value of investing into Dividend Growers instead. So, yes, focusing on the right kind of dividend stocks is vital. More returns. Lower volatility. Which actually brings me to an important point…

The myth of volatility — yes, it does matter!

Look, we’re trained as investors to think of volatility as not being a risk. “What does it matter if the stock goes up and down as long as I hold for the long term?” But here’s the thing… We aren’t robots. We’re human beings. Even the most grizzled, cynical Wall Street analyst who’s “seen it all” gets emotional from time to time. (Probably more than they’d care to admit.)

That goes 10X for the average everyday investor who doesn’t do this for a living every day.

We tend to get excited at the top of the market. (When it’s time to sell.) We tend to get really depressed at the bottom of it. (When it’s time to buy everything in sight at bargain prices.) And that forces us to make a lot of decisions we wouldn’t otherwise make in a vacuum. Which is why volatility DOES play a role in our decision-making. And I can tell you from first-hand experience that when you invest in dividend stocks like I’ve been doing over the past year, it makes it so much easier to avoid those ups and downs. It makes it easier to avoid making emotional decisions. And, yes, it quite literally makes it easier to sleep at night. The only thing keeping me up now is my kid, which I’ll take in a heartbeat! And while I’ll argue that any time is a good time to start investing in dividend stocks, I think now is the best time in recent memory.

Two reasons why right now looks like a generationally perfect time to invest in dividend stocks…

We both know 2022 was a rough year in the market, on both sides of the border and perhaps especially in the U.S. And while my portfolio was still down 7.9%, I was spared the pain of investors that were heavily into the Nasdaq — down closer to 30%. Now, I take pride in picking the right stocks inside my portfolio, sure… But if you look back historically, dividend stocks have dramatically outperformed throughout market downturns. As the following chart shows, with the exception of the financial crisis a little over a decade ago, high-yield dividend paying companies outperformed the overall market in EVERY recessionary bear market over the last 50 years.

Chart refers to U.S. market.

What’s more, while stock prices may be volatile during market downturns, dividend payouts that are passed onto shareholders are far more resilient.

Chart refers to U.S. market.

As you can see from the table, even when the market tanked by 83% during the Great Depression, companies only reduced their dividend payouts by 32%.

During the Global Financial Crisis, stock prices were more than halved, yet dividend payouts were entirely unaffected.

What’s more, owning dividend stocks makes it easier to hold on through bear markets and recessions because you’ll be paid (via dividends) to hold the stock until its share price recovers. Remember, we’ve already established that volatility is a very real risk and can lead to poor emotional decisions. That brings us to our second macro dividend tailwind, which you can probably guess… Much like during market downturns, Dividend Payers radically outperform Dividend Non-Payers in times of high inflation like right now. Have a look at this chart…

Chart refers to U.S. market.

As you can see from the chart, dividends have traditionally accounted for around 40% of the total annual market return. But in periods of high inflation like right now, dividends have been far more impactful. In the 1940s, dividends accounted for 65% of the U.S. S&P 500’s total returns. And in the 1970s — a period incredibly well-known for high inflation — that number jumped all the way up to a staggering 71%! Just consider how big of a percentage of the market returns that dividends could make up throughout the rest of the 2020s, with the end of inflation nowhere in sight. What’s more, according to Ned Davis Research, during times of high inflation Dividend Non-Payers have averaged a staggering -20.1% annual return. Almost comically bad. Meanwhile, Dividend Payers overall lost about 5% per year over those same periods — an outperformance of 14.9 percentage points over Non-Payers. But remember, we want to focus on Dividend Growers as often as possible.

So, check this out…

Dividend Growers have lost just 2.6% in high-inflation times, for a truly amazing outperformance of 17.5 percentage points over Non-Payers. Yet again, we see the vital importance of focusing on Dividend Growers, as opposed to just any old dividend stocks. But how are you going to do that? Are you going to comb through every single stock that pays a dividend (there are thousands)? Then, cross-reference all those thousands of stocks with their entire dividend payout history, to find which ones have been consistently growing their dividend? And after doing all that, do all the other standard investment due diligence you still have to perform in order to winnow down the list to companies that are actually good? That’s not hours or days of research there… We’re talking weeks of research… even months! But what if you could just have somebody do it all for you?

Introducing…

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As you might expect from the title of the service, Income Investor is all about realizing real income from your stock-market investments. And for good reason, as I’ve chronicled for you throughout this invitation. Our emphasis on a company’s dividend goes even deeper than you might expect. To us, a dividend isn’t just an additive component to a stock’s total return or a “nice-to-have” toss-in. It is THE singular driving force behind our investing philosophy and every recommendation we make here in Income Investor. That’s because companies that have the ability to pay steady and growing dividends over many years should have certain qualities, such as:

Long-term sustainable competitive advantages

High and defensible profit margins

Strong balance sheets

Experienced management teams that demonstrate strong capital allocation through multiple business cycles

Fast, reliable earnings growth that leads to ever-higher dividends for shareholders

Dividend-paying companies with the characteristics above are precisely what we’re looking for inside Income Investor. Our primary goal is to help you construct a portfolio of dividend-paying companies that can deliver outsized total returns, while also paying you a steady, sizable income stream for the rest of your life.

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The instant you join, you’ll get access to our initial six stock recommendations (five U.S, one dual-listed in the U.S. and Canada), already waiting for you on our private, members-only website as we speak. And we’ll be building that out to at least 10 picks within the first 30 days of the service going live. Here’s just a quick tease of some of the stocks you’ll find:

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