By Paul Tracy
I call it the "apple tree" loophole. I think it's one of the best ways I know to make money in the market, especially if you don't want to fuss over your investments every day.
But before I tell you what the loophole is, let me first tell you what it's not...
It's not illegal. It's not confusing. And it's not a get-rich-quick scheme.
When used properly, this loophole can greatly reduce the risk of losing money in any market.
But before I go on, I must say that there are a few caveats to how you use it. First, you have to follow this simple strategy exactly as I'll outline below. Second, it only works with high-yield stocks and funds.
It all started with a simple saying I heard years ago…
"The best time to plant a tree was 20 years ago. The second-best time is today."
That saying has stuck with me. And if you hadn't noticed, it's talking about a lot more than planting a couple of apple trees in your backyard and enjoying the fruit later.
The real lesson here is this: It's the moves we make today that deliver the greatest payoff down the road.
And that's the perfect analogy for investing in consistent, high-quality dividend payers. I firmly believe the high-yield stocks we buy today -- those with steady and increasing dividend payments -- are the ones that will end up paying us the most in the long run.
Just imagine if you had bought no more than a handful of the market's top dividend payers just 10 years ago.
- Altria (NYSE: MO) pays 5.2%, has increased the dividend 26% in the past three years, and has returned 617% in the last 10 years thanks to all the dividends paid.
- Realty Income (NYSE: O) brags of being the "Monthly Dividend Company" and returned 335% in ten years, thanks in part to its 4.9% yield.
- Magellan Midstream Partners (NYSE: MMP) has returned 890%, thanks in part to its 4%-plus yield and the fact that it has increased payments 233% since 2003.
As you can see, thanks to dividends, each of these investments easily returned over 300% in the past decade. Compare that with the relatively modest 118% return by the S&P 500 in the same period, and the power of dividends becomes apparent.
But the benefits don't stop there. If you were to hold those stocks for a longer period, then the difference would be even more pronounced.
And that's the premise for the loophole. Every time you're paid a dividend, the risk of losing money on that position gets smaller. And over time, those steady -- and increasing -- dividends can add up to unlikely returns, even from "boring" companies. Hold your stocks for long enough and eventually you're collecting pure profit with each dividend payment.
Of course, because it takes a while to make any dent if you're only being paid 2-3% a year, this strategy works best with higher-yielding stocks that pay 4%, 5% or more.
Now, with investing there is never a surefire thing. I can't guarantee success with the "apple tree" strategy, or any other investing strategy. But one thing you can't deny is that every dividend you receive makes it that much more likely that you will see a winning position.
And in a market that's keeping investors up at night, I can't think of a better way to make money without worrying over your investments every day.
Additional disclosure: StreetAuthority LLC owns shares of MMP, MO in one or more of its “real money” portfolios