This Simple Income Strategy Has Beaten the S&P 500 by 32% Since March 2008

By Jim Nelson

Here’s a prediction…

If you are searching for stocks that yield super-high dividends, you’re probably making a big mistake.

That’s because high yielders are much more volatile and tend
to underperform larger, safer dividend payers with longer histories of
dividend payments.

The first step to building a bulletproof income portfolio is not to reach for yield into riskier stocks. It’s to start with a solid foundation. To buy only the safest dividend stocks.

These stocks should make up the “bedrock” of your portfolio.

Take a look at the chart below. It shows the performance of three
important indexes since the start of the 2008 crash, all reset to a
baseline of 100. They are the S&P 500 (blue line), the S&P 500
Dividend Aristocrats Index (green line) and the S&P High Yield
Dividend Aristocrats Index (red line).

View Larger Chart

As you can see, the Dividend Aristocrats Index wins hands down. This
index contains only S&P 500 companies that have grown their
dividends every year for at least 25 years.

Only 51 companies — a hair over 10% of the entire index — qualify. That’s the kind of “bedrock” you’re looking for.

The High Yield Dividend Aristocrats Index selects its constituents
from the S&P Composite 1500, a larger group of stocks that includes
many riskier plays. Also, it requires only 20 years of dividend
increases. That’s how it can find higher-yielding stocks than the
Dividend Aristocrats Index.

But sticking to larger, longer-paying dividend stocks would have made
you 14.4% more on your investment than if you had stretched for those
high yields. And it outperformed the S&P 500 by an impressive 32%.

The reason is simple. High-yielding stocks often don’t stay that way for long.

Typically, the reason they have higher-than-average yields
is they carry more risk and have less growth potential than their
rivals. So they bump up their dividend payments to attract investors.
Other times, these higher yielders are paying out too much of their
earnings through dividends and can’t sustain their payout ratios.

Take beauty products maker Avon Products Inc. (NYSE:AVP),
for example. Its board was recently forced to cut the company’s
quarterly dividend from 23 cents to just 6 cents per share. That’s a
massive blow to income-hungry shareholders.

This is why I recommend that readers of my income advisory service, Income & Dividend Report, start off by building a solid bedrock of income.

That means buying shares in companies that have long histories of
raising their dividend payments. I also look for large-cap companies
with strong earnings growth, products that their customers can’t live
without and strong management teams.

These companies are best placed to weather market storms. They are
also best placed to continue growing their earnings — which they must
do if they are to keep paying out higher dividends.

One my favorite “bedrock” dividend payers right now is consumer products maker The Clorox Co. (NYSE:CLX), which owns household brands such Pine-Sol cleaners, Poett home-care products, Fresh Step cat litter and Glad trash bags.

Clorox has been paying a growing dividend for 35 consecutive years.
And it has continued to lay the foundation for future dividend hikes by
entering new, fast-growing emerging markets.

Make this — and stocks like it — the bedrock of your income
portfolio. And don’t get suckered by high yielders that can’t sustain
their dividend payouts.

Sincerely,

Jim

P.S. Clorox is a great way to start building a bulletproof income
portfolio. But there are even more solid and safe dividend stocks out
there. I recently recommended two of these super-safe stocks to Income & Dividend Report readers. To find out how to get access to them and to start receiving future recommendations, follow this link.