John D. Rockefeller once quipped that the only thing that gave him pleasure was to see his dividend coming in. The famous oil tycoon made that statement in the early 20th century, and for some investors during the tech boom of the late 1990s, it may well have seemed a hopelessly anachronistic sentiment.

After all, with the new millennium fast approaching in 1999, the average dividend yield on the S&P 500 had sunk to a multi-decade low below 1.2%. Meanwhile, the yield offered by the industry titans of the Dow Jones Industrial Average had sunk to just 1.6%, less than half the 3.4% rate dished out ten years earlier. At that point in time, no one seemed to care about a 1% or 2% yield when the market was rallying +15-20% annually and offering capital gains galore.

However, the frothy bull market of the 1990s was a statistical anomaly, as dividends have historically formed a key component of stock market returns over the long haul. In fact, between 1926 and 2005 the S&P 500 delivered total returns of +10.5% per year. Capital appreciation alone accounted for just +6.1% annually, or 58% of the total gains. The remaining 42% of the market's total return came in the form of dividend payments. This is a much larger percentage than most investors realize!
   
In part, the decline of dividends can be attributed to their high taxation, as payments were usually taxed heavily at both the corporate and personal level. However, favorable tax legislation was enacted in 2003. This effectively reduced the personal tax on dividends from as high as 38.6% (the top marginal tax bracket in 2003) to just 15%. Dividends suddenly became a much more efficient way to increase shareholder value. As a result, many companies decided to either increase their payouts or to initiate dividends for the first time, suddenly reversing a 20-year slide in the number of S&P dividend-paying firms. 

In fact, according to the Cato Institute, total aggregate dividend payments shelled out by S&P 500 members jumped +18% to $172 billion in the 12 months following the new law. That staggering total has swelled in years since, coming in at $247 billion in 2007. And turning our attention to the broader markets, 1,745 companies announced dividend increases in 2004, the first full year after the change in tax legislation. Clearly, dividends are back in favor with both corporate executives and investors.  

The Importance of Compounding
The dividend payments generated by a modest investment might seem to be inconsequential initially, but through the magic of compounding it won't take long before they can begin to make a dramatic impact on your portfolio.

After all, these dividends can be used to purchase more shares, leading to even larger dividend checks. These larger checks can then be used to buy even more shares and so on. In time, even a small stake in such stocks can grow into a tidy sum. 

For example, suppose an investor buys 1,000 shares of stock in XYZ Corp. at a purchase price of $10 per share (for an initial investment of $10,000). Next, let's assume that XYZ pays a steady annual dividend of 10%, and the shares rise at an +8% annual rate going forward. 

The very first quarterly dividend check would be worth just $250: (($10,000 * 0.1)/4). While that amount will certainly not go very far on its own, it is enough to purchase around 25 more shares at the initial $10 per share price. Of course, those 25 shares would then generate dividend payments of their own. As the chart below shows, this steady compounding process can yield amazing results over the long haul.

After 30 years, the initial 1,000 share stake in XYZ would have grown to 17,449 shares! At the same time, assuming a conservative +8% compounded annual growth rate, those shares would have soared from $10 to more than $100. As a result, the beginning $10,000 investment would have swelled to more than $1.7 million dollars, without ever adding another penny! 

But what would have happened if the investor just pocketed those dividend payments year after year? Well, the stock would still be worth about $100 after 30 years, but without any reinvestment he or she would only be left with the same 1,000 shares, for a total of approximately $100,000. Even when the cumulative dividends paid of $122,346 are included, the entire investment would still only have grown to around $223,000, which is more than $1.5 million less than with dividends reinvested. 

It's also worth pointing out that at the end of the 30-year period, the first portfolio would be generating annual dividend payments in excess of $170,000 ($1.7 M * 0.1). In other words, the investor's annual dividend income alone would amount to more than 17 times his or her initial $10,000 outlay!  

Income Stocks Offer More than Just Solid Dividends
You might ask why should an investor bother buying high-income stocks just to earn a few extra percentage points of return when the bond market offers a safer yield? Well, the answer is deceptively simple. Stock returns are really the product of two elements: dividends and capital gains.

Both bonds and income-oriented stocks can offer attractive yields. However, unlike their fixed-income counterparts, most dividend paying securities also offer decent capital appreciation prospects over time. That means investors are able to not only earn stellar dividend yields, but they can also realize additional gains from rising share prices. Bonds simply cannot match that upside potential. Furthermore, bonds are much more susceptible to interest rate fluctuations, as rising rates can quickly erode the value of their fixed interest payments. 

Income Investing is Now Back in Vogue
After more than a decade of playing second fiddle to capital gains, dividends are back in style. History shows that periods of abnormally large stock market gains are typically followed by extended periods of below-average returns. For example, the huge bull run in the Dow Industrials from the late 1940s to the mid-1960s gave way to a flat market from 1965 to 1980. Over this period, the Dow actually returned less than +1% annually (excluding dividends). This same pattern held true after the 1920s bull run and was also seen in the Japanese Nikkei after its huge advance during the 1980s. After the big run-up we've seen in the past few years, and the subsequent subprime crisis and general economic uncertainty afterwards, we could in for an extended period of uninspiring trading action.
 
One effective way to make money in a flat (or even declining) market is to collect dividends. In the slow growth decade of the 1970s, dividends accounted for nearly 80% of the market's total returns (as opposed to 10% during the 1990s). This strategy holds true because companies that pay dividends tend to have more reliable, stable businesses that hold up better during challenging economic conditions.
After all, to pay dividends over a prolonged period of time, a company must be able to generate dependable earnings. These are exactly the sort of companies that investors turn to for shelter in troubled times.

Each of the securities we'll profile in today's report features yields of 10% or higher -- that is far better than the rates offered by competing money market accounts, CDs, government bonds, or any other typical income securities.

(1.)  What to Look for in a Solid Dividend-Paying Security

While it might be tempting to invest exclusively in the market's highest-yielding securities, this shortcut approach usually leads to mediocre returns. To begin, off-the-charts dividend yields are typically the result of very depressed share prices. In many cases, the companies that offer such high yields are in poor financial shape.

In addition, poorly performing companies often see their share prices decline even further, leading to dismal overall returns. Remember that income stocks offer returns from two sources: dividends and capital gains (or losses). With this in mind, although you can hold a stock that offers an exceptional 15% dividend yield, if the underlying shares lose -20%, then your investment will end up losing money.

Furthermore, most dividends are by no means guaranteed. Companies can reduce their dividend payouts (or eliminate them altogether) whenever they like. As such, a fat dividend yield alone does not guarantee investment success.

With this in mind, we prefer to focus our research on those securities with a proven ability to not only pay dividends year after year, but also to increase their payouts. We also examine a number of other factors to ensure that our investment ideas are fundamentally sound, and look for securities with the best total return potential.

In an effort to determine whether a particular firm can be counted on to pay a sizable dividend plus deliver steady capital appreciation in the coming years, we've established a list of important investing criteria. Before investing in any dividend-paying stock, we carefully evaluate each of the following fundamental factors:

Yield -- A dividend yield indicates the annual return that a security delivers in the form of dividend payments. The yield can be calculated by simply dividing the annual dividend payment per share by the security's current stock price. For instance, let's assume XYZ Corp. is currently offering quarterly dividend payments of $0.50 per share for a total annual distribution of $2.00. Let's also assume XYZ stock is currently trading at a price of $50 per share. In this case, Company XYZ offers an annual dividend yield of 4% ($2.00/$50.00). In an effort to hone in on companies with the most impressive dividend yields, today's report focuses exclusively on securities with yields of 10% or more.

Payout Ratio -- Although we want to earn high returns on our investments, we're also careful to watch for too much of a good thing. A company's dividend payout ratio indicates the percentage of a firm's earnings that management is paying out to shareholders. The payout ratio can be calculated by dividing a stock's annual dividend payment by its annual earnings per share.

The average payout ratio for a component of the S&P 500 Index is around 30%. However, this figure varies greatly from industry to industry. Many high-tech sectors, for example, retain nearly all of their earnings to deploy back in the business. They therefore have very low (or zero) payout ratios. On the other hand, mature, slower-growing industries, such as utilities or banks, often boast payout ratios as high as 70% or more.

Meanwhile, real estate investment trusts (REITs) maintain even larger payout ratios, as they are required by law to return 90% of their earnings to shareholders in the form of dividends. And finally, some companies pay out more than 100% of their earnings to shareholders. In general, we prefer to avoid such firms, as those types of payout ratios almost always prove unsustainable over the long haul.

As a rule of thumb, we generally look for securities with dividend payout ratios below 80%. However, there are certain exceptions to this rule. For example, the payout ratios of securities such as master limited partnerships, Canadian income trusts and shipping firms can seem deceptively high if they are based on earnings instead of available cash flow. That's because these companies typically have very high non-cash depreciation expenses, which reduce earnings but don't affect the cash flow available to shareholders.

Reliability -- Companies are under no legal obligation to continue paying dividends. Therefore, we want to find those that we can count on to maintain and hopefully even increase their quarterly dividend payments. We usually look for companies that have paid consistent dividends for several years. Also, we look for firms with strong track records of increasing those dividend payments. A lengthy history of stable (or rising) dividend payments is often convincing evidence of a company's commitment to its shareholders.

Total Return -- Although dividends are certainly an important part of the picture, they don't represent the whole story. In the end, the total return that a stock delivers is a combination of its dividend yield and capital appreciation. A stock may pay a decent annual dividend, but if its share price declines year after year, then the net effect could be a flat, or possibly even a money-losing investment. Although income investors are typically willing to trade capital gains for the relative safety of predictable income, we prefer to look for stocks that offer the best of both worlds -- rich dividend payments and solid long-term growth potential.

Taxes -- Income investors should always be mindful of the after-tax rate of return they earn on any investment. A stock may pay a solid dividend, and its shares may outperform the market, but if those gains are taxed at a stiff rate, then this may neutralize them. As mentioned earlier, several years ago the tax rate imposed on most dividend distributions was reduced to 15%. One notable exception, however, are real estate investment trusts (REITs). Their distributions are still taxed as ordinary income at rates as high as 35%.

On the other hand, despite the higher tax rate, many REITs still generate after-tax returns that are far superior to other income stocks. Therefore, investors may want to consider shielding REIT dividends and other unqualified dividends by placing those stocks in qualified, tax-advantaged accounts, such as IRAs.

(2.)  Securities with 10%+ Dividend Yields

With all of the above factors in mind, we scoured the market in search of stocks with compelling dividend yields of at least 10%. Because small-cap firms are typically more volatile and have less stable earnings, we also looked exclusively for securities with market capitalizations above $100 million. Each of the following firms passed these two initial hurdles:

As noted earlier, we would be cautious of investing solely on the basis of yield. Therefore, the companies listed in this table may or may not be worthy of additional consideration. Naturally, when looking for high-quality income stocks, there should be much more to your search than simply finding stocks with impressive yields. You also need to take a number of other factors into consideration.

Along those lines, the next step was to have our research staff thoroughly analyze each of the securities shown in the table. In doing so, we came up with a list of our favorites with double-digit yields. We'll devote the remainder of this report to a closer look at these investment ideas.

(3.)  Frontline (NYSE: FRO)

Snapshot:  Frontline leases crude oil transport ships to companies all over the world. The company owns and charters a fleet of 20 mid-sized Suezmax carriers, which are designed for shorter journeys, and 42 Very Large Crude Carriers (VLCC), which are used to transport crude over long distances. The company also charters eight oil/bulk/ore (OBO) carriers.

(4.)  Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund (NYSE: MFD)

Snapshot:  This closed-end fund focuses on dividend-paying stocks based both in the U.S. and overseas. A majority of the fund's holdings are involved in the utility industry, including stocks and bonds of companies providing electricity, water, and wastewater services. The fund is also heavy in natural gas and oil pipeline plays -- another sector that tends to offer high yields for investors.

MFD's portfolio typically consists of about 70% stocks and 30% corporate bonds. In addition, the fund holds a majority of its portfolio in international securities.

The utility stocks MFD invests in are stable income-paying securities. Demand for basic services such as electricity and water is steady and predictable. After all, there's a reason the utility industry is often called the "essential services" industry -- because most consumers can't live without these utilities, demand remains steady throughout good times and bad.

And because they often operate as monopolies, the utility industry is heavily regulated by the government both in the U.S. and overseas. In most cases, the government sets the rates utility companies can charge their customers. These rates are designed to enable the utilities to earn a fair rate of return on their assets without allowing them to abuse their position in the market.

The end result of strong demand for utility services coupled with government regulated prices is a highly defensive sector with slow growth but strong, steady cash flows. Better still, those predictable cash flows are what enable the best-run utilities to pay consistent dividends to their shareholders.  

Dividends:  Over the past four quarters, the fund has paid out $6.54 per share in regular dividends and capital gains, giving it a monster yield of 33%. The company made a huge capital gain distribution of $4.43 per share in December 2007. While this amount is abnormally large, the company regularly pays out capital gains at the end of the year, which boosts the yield considerably. Meanwhile, the regular quarterly dividend has surged a remarkable +42% since MFD first launched in 2004 to its current $0.425 per share. Driven in no small part by its growing dividend, MFD has produced average annual returns of more than +15% over the last four years.

Outlook:  With major holdings like Italy's largest electric and natural gas utility firm, Enel, as well as British water and power utility giant United Utilities, MFD holds a strong portfolio of securities with consistent cash flows. That should enable investors in the fund to see steadily growing dividends and consistent share price appreciation in the coming years. 

(5.)  Capstead Mortgage Preferred B (NYSE: CMO-PB)

Snapshot:  As you may be able to tell by the hyphenated CMO-PB ticker symbol, this particular selection represents the preferred shares of Capstead Mortgage (NYSE: CMO), a real estate investment trust (REIT) that invests primarily in pools of mortgage loans. When investing in mortgage REITs, the biggest dividend payouts with the lowest risk are typically not found in common stocks, but in preferred shares. Preferred shares trade daily on stock exchanges just like common stock, but they also have the fixed income characteristics of a bond. 

The good news for investors is that CMO-PB is one of the most attractive of the bunch. Despite recent turmoil in the subprime mortgage market, Capstead Mortgage has remained remarkably resilient.

That's because this Dallas-based REIT invests mainly in single-family, adjustable rate mortgages (ARMs) issued and guaranteed by government-sponsored agencies like Fannie Mae (NYSE: FNM) and Ginnie Mae. These so-called "agency" securities carry an implied "AAA" rating, meaning they carry virtually no credit risk.

The implied government backing of these mortgage agencies became far more tangible when both the U.S. Treasury and the Federal Reserve stepped forward to strengthen Fannie Mae's position, citing the central role it played in the U.S. housing finance system.

Growth Drivers:  For investors seeking both dividends and capital gains, this particular preferred stock may be what they are looking for. While most preferred shares tend to trade in a relatively stable range (compared to the common shares) and have limited upside potential, CMO-PB is a convertible preferred. This means investors have the option of converting their preferred shares into Capstead's common stock. Therefore, shareholders are free to keep collecting the dividend checks as long as they choose, but also have the privilege of participating in the upside capital appreciation potential of the underlying common stock.

Based on the conversion ratio of approximately 0.6 common shares for each preferred share, few would choose to convert their shares at current prices. However, this attractive feature provides added flexibility and a potential opportunity to cash in on a sharp advance in Capstead's common stock.

Going forward, there are reasons to believe that Capstead's shares could increase in value. In late 2007 the company offered an additional 8 million common shares for sale on the open market. This offering netted more than $80 million for the firm, which it plans to use to buy more mortgages -- which should strengthen the company's future earnings. 

Dividends:  Over the last five years, shareholders have received steady monthly dividends of $0.105 per share. Even without the impact of capital appreciation, the shares' 10% dividend might be enough to top the performance of the major averages over the next few years.

Outlook:  Capstead is well-managed and has a successful track record of managing a leveraged portfolio of real estate securities, as well as modest real estate holdings. In fact, while much of the industry languished in 2008, Capstead's second-quarter earnings per share actually rose by +45% compared to 2007. And with most of its assets tied to adjustable rate mortgages (backed by government-sponsored agencies), the firm is somewhat protected from interest rate fluctuations. Looking forward, the firm's core portfolio is well positioned to weather the storm in the subprime mortgage sector.

(6.) Liberty All Star Growth Fund (NYSE: ASG)

Snapshot:  Formed in 1986, ASG is one of the most established closed-end funds around. It primarily targets the stocks of domestic U.S. companies with strong growth outlooks. The portfolio is divvied up between small, mid and large-cap companies with approximately the same weighting for each. In addition, each of these sectors is managed by a different investment firm. Despite enjoying the benefits of a multi-management approach, investors pay a reasonable management fee of just 1.37%.

The fund's heaviest industry concentration is in information technology -- a sector that has held up surprisingly well in today's markets. Roughly one-fourth of its assets are sunk into the sector, represented by such stocks as IT conglomerate IBM (NYSE: IBM) and design software developer Ansys (Nasdaq: ANSS). ASG's portfolio also holds fast-growing consumer stocks like Wal-Mart (NYSE: WMT) and McDonald's (NYSE: MCD), which have both posted double-digit gains over the past year.

Liberty All-Star Growth Fund(NYSE: ASG)

Summary:  One of the most established closed-end funds. Targets U.S. companies with strong growth potential. A large percentage of the fund's portfolio is invested in small and mid-cap companies with exceptional potential.

Dividend Yield:  11.5% Total Assets:  $170 million

Dividends:  Like other closed-end funds, ASG is a regulated investment company, which means it must hand over all taxable income to shareholders to avoid paying federal income taxes. To give some stability to these dividend payments, management enacted a managed distribution policy about 10 years ago.
With this policy in place, the fund pays out approximately 10% of its net asset value in the form of dividends every year.

Each quarterly dividend represents around 2.5% of the fund's NAV at the time the dividend is declared. The trailing 12-month distributions total $0.58, for a sizable yield of 12.5%.

About 80% of these distributions were comprised of long-term capital gains taxed at the reduced 15% rate, another 15% was taxed at ordinary income tax rates of up to 35%, and the balance was considered "qualified" -- meaning it is also taxed at 15%. Assuming future distributions are similar, the fund would be suitable for either an IRA or a taxable brokerage account.

The fund offers a dividend reinvestment plan, which automatically reinvests dividends in additional shares of the fund unless you choose not to do so.

Outlook: With most of its holdings concentrated in U.S. equities, ASG is more vulnerable to the ups and downs of the U.S. markets than a global fund with overseas exposure. Still, the mix of large, mid-sized, and small stocks diversifies the portfolio and minimizes risk. In addition, ASG focuses on companies with great growth potential in the long term.  

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(7.)  Conclusion

While many investors are drawn to the prospect of earning quick profits, true investing success is seldom found overnight. Legendary investors like Warren Buffett and Peter Lynch have proven that the path to wealth lies in thorough research and a long-term perspective. There are no shortcuts. 

So, how did these legends beat the market over time? They did so by capturing steady, consistent gains, year in and year out. Investing for the long haul is really nothing more than a game of compounding by earning a consistent return and reinvesting your profits back in the market over and over again. And of course, the magic of compounding is most powerful when an investor focuses on established companies that throw off a steady stream of dividends.   

We hope you noticed that this way of thinking inspires the content found in this report. It is also the guiding light for the other reports, newsletters, and extensive research available to our High-Yield Investing subscribers.  If you share a similar investing mindset, and if you're looking to generate a steady income stream from your portfolio, then our High-Yield Investing service is for you. 

Subscribe today and each month you'll receive a newsletter that is chock full of model portfolios, in-depth articles and dozens of individual investing ideas that offer yields of 6%, 8%, even 12% or more.  And when we say investment ideas, we mean not only stocks, but also bonds, mutual funds, preferred stocks, ETFs, royalty trusts, closed-end funds, Canadian income trusts, etc. We cover every class of income investment in High-Yield Investing.

Each newsletter also contains a list of firms that are getting ready to pay unusually large dividend payments in the coming weeks, as well as an in-depth profile of our favorite income security at the current time.  You'll also have access to two model portfolios (including our "10%-Plus Portfolio") and up to six special reports. At only $39.50 for a quarter, our High-Yield Investing service could be one of the best investments you've ever made.

Please note that your subscription comes with absolutely zero risk.  If you decide to cancel anytime within the first 30 days, then we'll provide you with a full refund the entire amount of your subscription -- every single cent.  Cancel anytime after 30 days and we'll send you a pro-rated refund for all issues not yet delivered. 

Thank you for reading this special report: Cash Cows.

Editorial Staff
StreetAuthority LLC
839-K Quince Orchard Blvd. 
Gaithersburg, MD 20878-1614

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