By Matt Koppenheffer, The Motley Fool

"Those who cannot remember the past are condemned to repeat it."

That George Santayana quote was always a little pessimistic for me. As investors, it certainly behooves us to study the past, figuring out what didn't work and how we can avoid it. But I think we're also well-served by looking at what did work, and figuring out how we can repeat that.

With that in mind, I was making the most of CNNMoney's great trove of past Fortune 500 data to examine the returns of some of the largest companies (based on profits) of decades past. Here's what I found.

In 1981...

Company

Profit

Dividend Adjusted Return 1/1/1981 to 5/16/2011

Compounded Annual Returns

ExxonMobil (XOM)
$5.7 billion 5,520% 14.1%
IBM (IBM)
$3.6 billion 1,920% 10.4%
Mobil $3.3 billion 410%* 9%*
Texaco $2.6 billion 911%** 11.8%**
Chevron $2.4 billion 2,850% 11.7%

Source: CNNMoney and Capital IQ, a Standard & Poor's Company.
*Returns through the 1999 merger with Exxon.
**Returns through the 2001 merger with Chevron.

For sake of comparison, I pulled up returns for the S&P 500 since 1981 and came up with 875%, or a 7.8% annualized return. Every one of the hulking companies above trounced the S&P's returns.

In 1991...

Company

Profit

Dividend Adjusted Return 1/1/1991 to 5/16/2011

Compounded Annual Returns

IBM $6 billion 736% 10.9%
ExxonMobil $5 billion 1,030% 12.6%
General Electric (GE ) $4.3 billion 617% 10.1%
Altria (MO) $3.5 billion 1,920% 15.8%
Dupont $2.3 billion 471% 8.9%

Source: CNNMoney and Capital IQ, a Standard & Poor's Company.

For this period, the S&P 500 returned 307% or 7.1% per year, once again well short of what the top profiteers of the Fortune 500 delivered.

A Curious Result

The result made little sense. These were some of the biggest companies in existence in both of these periods. How could they all have beaten the S&P 500 so badly? After all, they were key components of that index!

After spending an admittedly embarrassing amount of time pondering this, the truth hit me like a ton of bricks. I was comparing the dividend-adjusted returns of these stocks to the simple price change for the S&P 500.

Though you rarely hear people talk about "S&P 500 total returns," it's an important distinction, because there's a big returns difference when you factor in those quarterly kickbacks. Unfortunately, the data available on the S&P's total returns is pretty spotty.

Using Vanguard's S&P 500 index fund (which goes back to 1987) as a proxy, I was, however, able to find that its total return since 1991 has been 505%. Though it still falls short of four of the five companies in the table above, that number makes a lot more sense.

A Big Difference

I don't need reminders about why dividends are important -- I already know they're a very important component of investment returns. But I don't mind an extra reminder.

But there's been trouble in paradise for dividend investors -- particularly those who like the ease of index funds.

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As my altogether unnecessary red arrow points out, dividends from the S&P 500 have been like a contestant on The Biggest Loser -- they're getting mighty slim. And with dividends playing such a big part in historical returns, this is very bad news for investors.

You Can Go Your Own Way

Happily, we don't have to simply take the S&P's yield and whimper, "Thank you, sir! May I have another?" Instead, we can venture beyond the safety of the index to build a portfolio of stocks with yields worth having.

Now, I know that some readers will disagree with me on this, but I don't think it's ideal to simply grab the biggest yields available. I want to look back 30 years from now at the massive long-term returns that I've racked up. In addition to worthwhile yields, I want quality companies that I can expect to be around 30 years from now.

With that in mind, here are five stocks that I think fit the bill. All five have dividend yields well in excess of the S&P's, trade at reasonable valuations, and sport impressive Buffett ratios. I believe that all of these businesses have what it takes to continue to succeed for decades to come.

Company

Dividend Yield

Forward Price-to-Earnings Ratio

Buffett Ratio

Johnson & Johnson (JNJ ) 3.4% 13.5 30.9%
McDonald's (MCD ) 3% 15.7 22.2%
Kimberly-Clark (KMB ) 4.1% 13.8 21.5%
Sysco (SYY ) 3.3% 15.6 23.6%
Mattel (MAT ) 3.5% 12.5 27.7%

Source: Capital IQ, a Standard & Poor's company.

The stocks above aren't idle musings -- on four of the five, I've got my money where my mouth is, and they're all currently in my portfolio. Kimberly-Clark is the only one that isn't, and frankly, I'm not sure why I haven't added it yet.

In these times of payout drought, stock like those above will give your portfolio the dividends it so desperately needs to grow. And if five ideas aren't enough for you, my fellow Fools have put together a special report outlining "13 High-Yielding Stocks to Buy Today." And you can get a free copy by clicking here.


Motley Fool newsletter services have recommended Johnson & Johnson, Kimberly-Clark, Sysco, McDonald's, and Chevron. The Motley Fool owns shares of Johnson & Johnson, International Business Machines, and Altria Group. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Chevron, Johnson & Johnson, Mattel, McDonald's, and Sysco, but does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.





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mount carmine

When is AOL getting rid of huffpost?

May 18 2011 at 4:21 PM Report abuse -1 rate up rate down Reply
mount carmine

When is AOL gwtting rid of huffpost?

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