It's true that past performance is not indicative of future returns, but that doesn't mean we can't learn from it. By identifying key traits of investments that have worked well, we can narrow down our search for great stocks by seeking those traits in current opportunities.

Looking back at which stocks succeeded over the 10 years that ended this month is a particularly intriguing and unique exercise, given that the S&P 500 returned just 2.5% annualized over the period.

The rather lackluster performance over the last decade, paired with some substantial volatility along the way, has led some investors to leave equities for dead once more. And that can present strong long-term opportunities in today's market.

Into the way-back machine
If there's one thing I learned from being a history major in college (besides that there's a lack of job opportunities after graduation), it's that you must put the past into context before you can properly analyze it. So let's take a closer look at where things stood in August 2001.

By then, the Nasdaq had lost nearly two-thirds of its peak dot-com-bubble value and, as we know, things would get worse in the following month. At that point, the economy was shrinking, Enron shares were starting to plunge, and the Fed was lowering rates to boost the economy during the recession. Most sectors lost value in 2001, so there were (in hindsight) some values to be found in the market.

I've gone back and identified the best dividend-paying stocks of the past decade, based on the following criteria:

  • The company had to pay dividends each year.
  • It was not allowed to cut or suspend the dividend at any point.
  • It must be U.S.-based, trading on a major U.S. exchange.
  • It had to carry a starting dividend yield above the S&P 500 average at the time (1.37%)

I've further subdivided the results by 2001 market capitalization: large cap, mid cap, and small cap.

The envelope, please
Here are the top five large-cap dividend payers of the past decade ...

Company

Industry

Dividend Yield as of Aug. 31, 2001

Dividend-Adjusted Return
(Aug. 31, 2001-Aug. 31, 2011)

Occidental Petroleum (NYS: OXY)

Oil & Gas

3.6%

680%

Caterpillar (NYS: CAT)

Machinery

2.8%

358%

Altria  (NYS: MO)

Tobacco

4.5%

352%

Deere & Co. (NYS: DE)

Machinery

2.0%

349%

Union Pacific

Railroad

1.5%

313%

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

... the top five mid caps ...

Company

Industry

Dividend Yield as of Aug. 31, 2001

Dividend-Adjusted Return
 (Aug. 31, 2001-Aug. 31, 2011)

Nordstrom

Retail

1.8%

443%

Public Storage

REIT-Industrial

2.6%

425%

Praxair

Industrial Gas

1.4%

396%

Rockwell Automation

Electrical Equipment

6.4%

394%

Monsanto (NYS: MON)

Agricultural Chemicals

1.4%

372%

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

... and the top five small caps.

Company

Industry

Dividend Yield Aug. 31, 2001

Dividend-Adjusted Return
(Aug. 31, 2001-Aug. 31, 2011)

HollyFrontier

Energy

1.7%

1,531%

World Fuel Services

Energy

2.4%

1,202%

Cummins

Machinery

3.2%

1,066%

Alliance Resource Partners LP (NAS: ARLP)

Energy

8.2%

1,036%

Lufkin Industries

Energy

2.7%

1,000%

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

The past decade certainly belonged to energy and industrial dividend-paying stocks.

In August 2001, oil changed hands at just $27 a barrel, and it's since risen at a 12.3% annualized rate -- and that's counting the recent dip in oil prices! So not only were energy stocks out of favor in 2001, but surging oil prices provided a strong tailwind over the next decade.

Industrials similarly benefited from a tailwind, namely increased demand for machinery in emerging markets. Those industrial companies that had a wide geographic footprint prior to August 2001 -- like Caterpillar and Deere -- did particularly well.

Time to reflect
Now that you know the best dividend stocks of the past decade, let's consider which might be the best in the next decade. If this exercise taught us anything, it's this: Start your search in out-of-favor industries, and then find those companies that have enough cash flow to fund their payouts for years to come.

Three of the worst-performing S&P sectors over the past five years have been financials, health care, and telecommunications, so let's start our search there. Here are a handful of stocks that have promising fundamentals and above-average dividend yields but are in out-of-favor industries:

Company

Industry

Dividend Yield

Return on Equity

T. Rowe Price Group

Financials

2.3%

24%

Medtronic

Health Care

2.8%

20%

USA Mobility

Telecommunications

6.5%

58%

Johnson & Johnson (NYS: JNJ)

Health Care

3.5%

20%

Federated Investors

Financials

5.4%

36%

Source: Capital IQ, as of August 31, 2011.

None of this is to say there isn't downside risk if the economy takes another turn for the worse, but if you want to have a chance of owning one of the best dividend stocks of the next decade, these out-of-favor industries are a good place to start.

Want some more dividend ideas? Click here for a free report from Motley Fool expert analysts: "13 High-Yielding Stocks to Buy Today."

At the time this article was published Todd Wenning is advisor of Motley Fool UK Dividend Edge. He owns shares of Johnson & Johnson. You can follow him on Twitter. The Motley Fool owns shares of Altria, T. Rowe Price, Johnson & Johnson, and Medtronic. Motley Fool newsletter services have recommended buying shares of Alliance Resource Partners, Johnson & Johnson, and Federated Investors, as well as creating a synthetic long strategy on Monsanto and a diagonal call on Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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As to the stunning 6.4% dividend performance of Rockwell Automatic: when I calculated return on basis of the August 11 dividend of $0.425 on current price of about $58 I get about 2.9%. Is it the singular dividend in July, 2001, of $23.51 that raises the average ten-year dividend to such an exaulted level? If so, and though true mathematically, doesn't the 6.4% really misrepresent Rockwell"s dividend performance which is of modest standing over the last 9-1/2 years?

September 09 2011 at 11:23 AM Report abuse rate up rate down Reply