Automatic Wealth Machines

Let's look at what makes a "wealth machine." I call Altria and ExxonMobil wealth machines not because they were great companies (although they were) or because they paid a dividend -- after all, not every dividend payer can be called a wealth machine -- but because they consistently raised their dividends. And they were able to do that because they performed consistently well.

What may surprise you is that research by Robert Arnott of Research Affiliates and Clifford Asness of AQR Capital Management has shown that companies with higher dividend payout ratios -- the amount of the dividend compared to net income -- tend to have higher real earnings growth in the following 10-year period. In other words, they're better-run companies. And we already know what earnings growth means for a company as far as price goes.

Source: Motley Fool

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