Dividend Superstars
Funds with 10%-Plus Yields

It is a widely-held belief that most dividend-paying stocks are slow movers, crawling along while their growth counterparts race past. However, that is actually a common misperception -- and it can be costly. Actually, dividend-paying stocks often outperform non-payers, even in bull markets. Over the past year, for example, dividend-paying members of the S&P 500 have delivered a gain of +23.7% -- versus just +20.5% for non-payers.

And over the past eight decades, dividend distributions have accounted for almost half (42%) of the market's total returns. In other words, those quarterly payments might seem almost inconsequential at times, but remove them from the picture, and the market's long-term returns would have been virtually cut in half.

In today's report, we will explore the essential role that dividends can play in your portfolio -- and profile two proven high-yield fund ideas that you can put to work today.

(1.)  Slow and Steady Wins the Race

Dividends may not make you rich overnight, but they can add up dramatically over time. How? By harnessing the power of compound interest -- what Albert Einstein once called "the most powerful force in the universe." 

Reinvested dividend payments can be one of the most reliable ways to systematically build wealth over time. After all, those payments can be used to buy more shares, which then earn additional interest, which in turn purchase even more shares... and so on.

The table below shows the growth of a $25,000 hypothetical investment, assuming dividend reinvestment and additional contributions of $5,000 per year. 

As you can see, steady yields can turn a modest investment into a tidy half-million dollar nest egg over twenty years. And this chart doesn't assume any capital appreciation -- simply the dividend yields illustrated.

(2.)  $250 Billion and Counting

Throughout the late 1990s, dividends were indeed on the decline. At the time, emerging dot-coms were soaring, and many investors had grown accustomed to abnormally high returns. And in that environment, few investors could get excited about insignificant 2%-3% yields -- not when shares of tech companies seemed to deliver gains like that almost daily.

At the same time, corporate boardrooms were also much less enthusiastic about doling out dividend payments. Much of the blame could be pinned on unfavorable tax treatment. Any money received by shareholders in the form of dividends is taxed twice -- once at the corporate level (usually 35%) and then again at the individual investor's level (up to 38.6% in 2003)

By contrast, share price appreciation was only taxed once -- and even then at a potentially lower capital gains rate. With that disincentive in place, many companies began diverting excess cash that once funded dividends. They instead channeled it back into the business or earmarked it for more tax-efficient stock buyback programs.

All of this added up to a gradual decline in the popularity of dividends and a corresponding drop in the number of dividend-paying companies. By 2001, the number of dividend-paying members in the S&P 500 slipped to a 20-year low of just 350 -- down from 470 in 1980. Meanwhile, the overall yield on the index sank from a post World War II average of 4.1% to a paltry 1.2%. Even more troubling, less-established firms practically shunned dividends altogether, with less than 4% (or 1 in 25) of new publicly traded companies making any dividend payments at all.

However, all that changed in 2003 after new legislation was enacted that reduced the tax ceiling on dividend distributions to just 15% (down from a top marginal rate of 38.6%). As expected, the move had an immediate impact, coaxing many companies to boost their dividends, while enticing others to make payments for the first time.

The impact was immediate. Within months, blue-chip giants like Citigroup (NYSE: C), Wal-Mart (NYSE: WMT), and PepsiCo (NYSE: PEP) all announced sharp dividend increases, and many smaller companies initiated new payments for the first time. Within a year of the new tax laws, the total annual dividend payments distributed by S&P firms jumped +18% -- from $146 billion to $172 billion. By no means though was the resurgence of dividends limited to just the big boys. In fact, over 2,000 companies representing a wide range of industries decided to increase their dividend payments after the tax cut.

Since then, the sweeping trend has shown no signs of slowing, with thousands of companies showering their shareholders with more cash than ever before -- more than $250 billion in aggregate among S&P firms alone this year. 

Obviously, this is all great news for income-oriented investors. With dividends continuing to proliferate, an expanding number of firms are now dishing out a steady (and often rising) stream of tax-advantaged income to their shareholders. At the same time, the number of funds investing in dividend-paying stocks has also ballooned. 

As with any other asset class, equity-income funds offer a number of advantages for most investors, including sound diversification, no-hassle dividend reinvestment, and professional day-to-day management of veteran portfolio managers. However, income-seeking investors in particular have an even stronger argument for choosing funds over individual stocks -- leverage. Specifically, closed-end funds can borrow money at attractive rates and then plow the proceeds back into the portfolio -- significantly juicing yields.

In the remainder of today's report, we'll take a detailed look at two of the most promising funds for dividend lovers -- both with robust yields of 10% or more.

END OF FREE CONTENT

The remainder of this report is available exclusively to paid subscribers. In it, we provide an in-depth analysis of our two favorite dividend-focused funds. These securities include:

A fund that has been on the market for almost 20 years -- which shows it can weather any market. It also yields an enticing 10.0%.

A closed-end fund invested in bellwethers like Exxon, Pfizer, and General Electric that yields 10.5%.

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I sincerely hope you've enjoyed today's report on ETFs with 10% or higher yields!




Nathan Slaughter
Editor
The ETF Authority
StreetAuthority.com
http://www.StreetAuthority.com

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