This portfolio of five shares will crushes the S&P 500

Most investors still don’t understand dividend stocks. Why? Because they spend way too much time obsessing over one figure—the dividend yield—and ignore stocks with payouts below some arbitrary number, say 2%, which is about what the SPDR S&P 500 ETF (SPY) pays.

Consider Visa (V), a stock that gets zero love from the dividend crowd, no thanks to its 0.69% trailing-twelve-month yield, which has gone nowhere for five years:

Dividend return

As we see the graph dividend increases over the years, but this is at the expense of increasing revenue reflects price before dividend.
Here is a comparison of price movement to the growth of the dividend. The graph clearly shows that the increase in the dividend follows once the price has risen.

So if you’d bought in five years ago, you’d actually be sitting on a 215% total return (including dividends) on your Visa shares today. And forget about a 0.69% yield—you’d be reaping 2.3%.

Which brings me to the other reason why investors sometimes shun V: its seemingly high forward price-to-earnings (P/E) ratio of 26.7. But the truth is, it’s averaged almost precisely that over the last five years, when the stock went on its stellar run.

You need to look beyond yield and P/E when picking dividend stocks. Adding two other stats will give you a more complete picture:

The payout ratio —or the percentage of earnings paid out as dividends in the last 12 months—is a measly 23%, so V has plenty of dividend-growth juice left. I consider any figure below 50% a sign of a safe dividend (and higher for real estate investment trusts (REITs), as I’ll explain in a moment.

Earnings growth: in its fiscal 2017 first quarter, Visa’s earnings per share (EPS) jumped 7.5%, to $0.86 from $0.80 a year ago; the Street expected EPS to fall to $0.78. For all of fiscal 2017, analysts see EPS hitting $3.32, up from $2.84 in fiscal ’16.

To find more actions, ready to give as much as Visa gave the last five years should look for those stocks that have the same telltale signs such as Visa.

Here are four shares that have the same odds as Visa five years ago:

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