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’d always been a growth investing disciple, 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 and momentum 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, of course. But also bonds… real estate… art and collectibles… you name it.

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. To my eyes – not to mention my models – essentially everything felt like it was trading at an unsustainable valuation. 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 USD investment in the S&P 500 Index would have grown to $795,823 USD 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 USD to be precise, good for 495X your initial $10,000 USD investment.

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

That’s as obvious of a life-altering outcome as you’ll encounter. $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. Let’s do a little quick math… Even if you got paid a relatively moderate 3% yield 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.

Chart refers to U.S. market.

After just a decade’s worth of time, you’d have already generated upwards of $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 income from the dividends.

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

That’s 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 not only dividend-paying but – this part’s 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? What’s so great about LOSING 7.9%?”

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 incredibly difficult for me to find a stock I personally want to invest in that DOES NOT pay a dividend

The benefits are simply too powerful, not to mention too obvious. Have a look at this table… (It’s a bit confusing at first, but I’ll summarize directly below.)

Chart refers to U.S. market.

The first thing you’ll notice is just the stark difference in annual returns from 1973 to 2021 between Dividend Payers (+9.6%) and Dividend Non-Payers (+4.79%). 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 bang average market volatility. Anything BELOW 1 is less volatile than the overall market. Anything ABOVE 1 is more volatile. 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!

Chart refers to U.S. market.

Dividend Payers have a Beta of .94 (lower volatility than market average) vs. 1.18 (higher volatility than the market average) for Dividend Non-Payers. Higher returns. Lower volatility. What else could you want in a stock? 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-paying 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 nuanced 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

Dividend Cutters/Eliminators.

Pretty self-explanatory, right?

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 that they have plenty to spare, so let’s give even more back to our shareholders as a reward for owning a piece of our business. These are the kind of companies we really, 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% from 1973 to 2021. Frankly, that’s horrendous. 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 subtle nuances just like that can cost you big.

Here’s how big.

Chart refers to U.S. market.

If you’d put just $100 USD into the U.S. S&P 500 with no regard for dividends whatsoever back in 1973, by 2021 you’d have $4,744 USD, 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 USD — 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 USD bill would have grown to $14,405 USD. 144X your initial investment, and 3.5X the return of the S&P 500 Index itself. On the other hand, look how our dreaded 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?” It’s a nice sentiment, and technically it is true. 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.

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.) 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 couple years, 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 is a trade-off 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. In fact, here are…

Three reasons why right now looks like a historically ideal time to invest in dividend stocks

Barron’s recently ran a headline saying: Get this. The median stock in the iShares Select Dividend ETF trades for about 12 times 2024 earnings, while the Nasdaq 100 trades for about 22 times earnings. Translation: dividend-paying stocks are dirt cheap right now. How cheap? As Barron’s notes, with the recent run-up in technology stocks, if dividend payers were to underperform by another 10 to 15 percentage points, it would make them the most attractive they’ve been relative to growth stocks at any point in the past five years. 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, like we saw in 2022. 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.

And while the market has been on the upswing of late, economists, corporate executives, financiers, and business media talking heads are still warning us about a potential impending recession. This might be the best part, though… 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) pure cash 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 actually 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. I’m guessing that’s already far higher than you might have expected, but in periods of high inflation like right now, dividends have been even more impactful. In the 1940s, dividends accounted for 65% of the U.S. S&P 500’s total returns. And in the 1970s – the standard bearer for a high-inflation economy in America – 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… What’s more, during times of high inflation Dividend Non-Payers have averaged a staggering -20.1% annual return. All I can say for that is… yikes. 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.

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 laser-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?

Well, I’ve got great news…

For the next few days only, it’s the Grand Reopening of…

One of the newest services from The Motley Fool!

This is only the second time in history we’ve made Income Investor available on a special offer.

And as you might expect from the title of the service, Income Investor is all about generating passive income through dividends. 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, like:

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.

More specifically, these are the kind of performance benchmarks we’re looking for inside Income Investor:

Accuracy: We’ll begin by targeting a positive overall return from 90% of our recommendations after three years.

Dividend investing lends itself to higher accuracy, so we want to make sure that the vast majority of our picks are in positive territory after a reasonable length of time.

Dividend Growth: Because of our emphasis on dividend growth, we’d like to see our average recommendation grow its dividend by at least twice the rate of inflation over time.

Doing so will demonstrate that our companies are growing revenue and earnings at rates that exceed the level of price growth in the overall economy, while rewarding shareholders along the way.

Above-Average Yield: We want the average aggregate dividend yield of our recommendations to exceed the yield of the U.S. S&P 500 by at least 50%.

As of February 2023, the U.S. S&P 500’s trailing annual dividend yield was approximately 1.6%. That means Income Investor’s average dividend yield in Income Investor should exceed 2.4%.

Total Return & Inflation: Finally, we want our average recommendation to deliver a total return, inclusive of reinvested dividends, that is greater than 7% plus the rate of inflation.

Why 7%? A 7% annual return doubles the value of an investment over 10 years. If inflation is included, that means an investor in our average recommendation should double his or her real purchasing power every 10 years.

We believe adhering to these benchmarks will help us ensure that we’re selecting high-quality companies with the potential to deliver both excellent returns and stable, growing income to Income Investor members.

Which brings me to a question that’s likely starting to bubble up in your head…

“What exactly will I get as a member of Income Investor?”

The instant you join, you’ll get access to our current 12 stock recommendations, already waiting for you on our private, members-only website as we speak. Here’s just a quick tease of some of the stocks you’ll find:

“The E-commerce Tollbooth” — Here’s a hurricane-force tailwind for you. Real estate services firm CBRE estimates that every $1 billion of incremental online sales requires about one million square feet of physical space to store, sort, and process deliveries and returns. On top of that, they project eCommerce itself to grow by $1.5 trillion USD over the next half-decade.

Do the math and you’re looking at a global economy that will need about 1.5 billion square feet of additional warehouse and logistics space, including an estimated 330 million square feet in the U.S. alone.

That’s where “The eCommerce Tollbooth” comes in. As a real estate investment trust (REIT) laser-focused on warehouses and fulfillment centers with operations across 19 countries, it’s perfectly positioned to supply the space for eCommerce giants (such as leading client Amazon) – while charging a pretty penny in the process. Plus, they pay a hearty 2.5% yield to boot!

“The Spin-Off Superstar” — Now here’s a spicy opportunity. A prominent Canadian multinational investment management company just spun off their asset management division because they thought it was radically undervalued compared to its pure-play peers.

The “new” business is what’s referred to as a global alternative asset manager. Basically, they invest in things other than stocks and bonds – in this case, $750 billion of assets under management spread across real estate, infrastructure, renewable power and transmission, private equity, and credit.

But where things get interesting is that the new asset-management business aims to pay out about 90% of its earnings in dividends, currently equating to an enticing 3.7% yield. And here’s the real kicker – while the current dividend is set to pay out $1.28 per share annually, some analysts at the Fool expect that to roughly double to more than $2.50 within a half-decade. That would give us a more than 7% yield at today’s price!

Of course, that’s just the beginning of everything you’ll get as a member in our Grand Reopening of Income Investor, including:

AT LEAST one recommendation every single month, every one of which I also plan to own in my personal portfolio. That’s just how confident I am in every recommendation we’ll be putting forth inside Income Investor.

A monthly top 10 ranking of our favorite stocks in the service, so you always know which ones we prefer at any point in time.

A monthly commentary with updates on significant events impacting our recommendations.

More timely updates as needed if there is a material change to one of our investment theses.

“Sell” recommendations in the event that we no longer strongly support one of our positions.

But that’s not even close to everything you’ll get when you become a member of Income Investor during our Grand Reopening today…

A $580 value

Much like Income Investor itself, our new “Ultimate Income Portfolio” Report was built for investors who want to generate income from their investments, whether it’s to live off of in retirement or just to make extra cash when you want it. But we aren’t just chasing any old Canadian stock that pays a dividend… we know there’s a big difference between a marginal company that pays a great dividend and a rock-solid company that also pays a great dividend. And that difference represents peace of mind… capital preservation… and the kind of steady long-term gains we all dream about! This hot-off-the-presses report boasts a staggering 20 total TSX recommendations, each handpicked by Motley Fool Canada CIO Iain Butler and longtime Canadian analyst Nate Parmelee — and all of which you’ll get access to the instant you accept this offer today! This report carries a value of $580. In other words, that’s $580 in bonus research you’ll receive at no extra cost today. Think of it as a way to “instantly” assemble a diversified portfolio of what our experts believe are 20 top dividend plays right here in Canada! But, valuable and jam-packed as this new report may be, it’s not the only bonus gift you’ll receive!

Because when you join us with this “Early Bird” Grand Reopening offer before tonight at midnight, you’ll also get a FREE upgrade to VIP status, including the following ADDITIONAL bonus reports:

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