Investment strategies that focus on investing in dividend-paying stocks have a long-term record of outperforming the S&P 500 index with less volatility, fund managers and other investment professionals say.

In addition, dividends have been a significant contributor to the long-term total return of the S&P 500. Such advantages are likely to persist over time and, hence, are putting total-return investing back in the spotlight for large numbers of investors and financial advisors.

Research Total Return Leaders

Based on compounded annual price appreciation and dividends for the 10-year period ending Nov. 12, 2009, for stocks (including ADRs) trading at or above $2 a share as of Nov. 12, 1999:

Company (Total Return)

Alliance Resource Partners (+29.03%)
National Retail Properties (+15.61%)
ONEOK Partners (+17.27%)
Plains All American Pipeline (+18.27%)

Source: Capital IQ, a Standard & Poor’s business.

Many financial advisors, investors and investment managers believe that dividends are not mere payouts of a portion of profits. Dividends signify that management is interested in its shareholders, or unitholders, and are a potent indicator of the underlying sustainability of earnings and cash flows.

For total-return investors, dividends and the growth of dividends provide positive compounding benefits. They also supply important income and income growth potential for income investors.

“Dividend income is an important component of the total-return story,” explains Kevin Habicht, chief financial officer of National Retail Properties. “As many investors seek stability and move closer to retirement, they are looking for some cash income, and that means consistent dividend income is being looked at more favorably than in the past.”

Producing growing dividends and outstanding total returns year after year is no easy feat, however, especially when economic and financial conditions are as volatile as they’ve been recently.

To grasp how such performance is best executed, Research spoke in depth with Habicht and Brian Cantrell, chief financial officer of Tulsa, Okla.-based Alliance Resource Partners. Their analysis and outlook indicates just how much effort is involved and how, when done correctly, such discipline becomes second nature.

Tale of Two Companies

Alliance Resource Partners is a master limited partnership, or MLP, that produces and markets coal to utilities and major industrial users nationwide. In the third quarter ended September 30, 2009, the company had revenues of about $300 million and net income of $36 million.

“Our success is a reflection of our continuous focus on solid business fundamentals,” Cantrell explains. “We honor our commitments, value our relationships, work to keep our balance sheet strong, and manage for long-term growth in cash flow in line with our primary corporate goal being to create sustainable increases in returns for our unitholders — in other words, basic blocking and tackling in the execution of solid business fundamentals.”

Such execution is vital, since Alliance Resource Partners’ customers turn to the company for the delivery of critical products. “Most of our contracts are long term in nature, and our production is sold to large power generators, the vast majority being electric utility companies,” says Cantrell. “Our customers value the diversity and reliability of Alliance’s operations.”

Alliance Resource Partners’ 10-year total-return performance, according to Capital IQ, a Standard & Poor’s business, tops that of companies such as Apple and Altria Group. It is also better than that of Yanzhou Coal Mining Company of China, for instance, and Arch Coal.

National Retail Properties, an Orlando, Fla.-based real estate investment trust, invests primarily in high-quality properties subject to long-term net leases. In the quarter ended September 30, 2009, it had revenues of $57 million and net earnings of roughly $21 million. It invested about $10 million in new properties during the three-month period.

The company’s 10-year total-return performance puts it ahead of other industry players like Essex Property Trust and Boston Properties.

“We benchmark ourselves, typically on a quarterly basis and in a number of ways, including total shareholder return,” Habicht explains. “We benchmark ourselves against a number of indexes, including the NAREIT Index, the MSCI U.S. REIT Index, the S&P 500 and the S&P 600, of which we are a member. We look at one-, three-, five, 10- and 15-year time periods and have outperformed all these indexes — in each of those time periods.”

How does it consistently produce such a performance? Like other companies with strong total returns, National Retail Properties closely adheres to the business processes and strategies that it’s put in place.

“We believe this is a testament to our business model, the strength of well-located, long-term net-leased properties, a strong balance sheet and our 20-consecutive-year track record of increased dividends, all of which have allowed us to outperform the REIT industry and general equity total return averages for the one, three-, five, 10- and 15-year time periods.”

This means that year after year, National Retail Properties has to focus on the factor that’s most significant to the industry it competes in: location, location, location.

“High-quality tenants and long-term net leases are important, but most important to us is the quality of the location,” shares Habicht. “Even though retailing is a difficult business, if you own good real estate, you’re always able to attract good retailers, which is why the quality of our locations is most important – in our mind — to producing a consistent, ongoing rental revenue stream.”

Also unique to National Retail Properties is the fact that its leases are long term, with initial terms of 15 to 20 years in length, and a remaining average term of 13 years, he says: “Good locations combined with long-term net leases means that the stability of our rental revenue is higher than that of others in the real estate industry.”

Growth Paths

Good fundamentals are what it’s all about, executives say.

“Our growth has generally been focused on identifying the next generation of reserves, developing access to these reserves at the appropriate time and then efficiently running the operations as we produce those reserves,” according to Alliance Resource Partners’ Cantrell. “Our growth, in other words, has been more organic than M&A driven.”

In 2009, Alliance Resource Partners entered into a new coal-supply agreement with the Tennessee Valley Authority to increase its annual coal supply to TVA by an additional two million tons per year beginning in 2010.

“Under the new agreement, we will deliver five million tons of coal per year from our Illinois Basin operations to TVA over the next seven years,” notes Cantrell. “In addition, under the terms of the new agreement, there’s the possibility to extend deliveries of five million tons per year for up to an additional seven years beyond the initial term.”

How did Alliance reach such a deal? “TVA was focused on ensuring that it had security of supply and, given Alliance’s long-standing relationship with them and our historic track record of performance and financial stability, we were able to reach this agreement,” concludes the CFO.

For National Retail Properties, growth comes primarily from two sources. “Internal growth comes from our leases, which provide for rent to increase 1.5 to 2.0 percent yearly. External growth comes from deploying capital into new property acquisitions and generating a return above our cost of capital,” according to Habicht.

“Additionally, we have been able to grow rental revenue by selling a number of our properties at very good prices and re-deploying that capital into new higher-yielding properties – what we call capital recycling,” explains the CFO.

Future Focus

To ensure its ongoing total-return performance, Alliance Resource Partners works diligently on its project pipeline. “We currently have two projects that are under construction,” says Cantrell.

“Our Riverview mine in Western Kentucky has recently started production operations and will ramp to full production capacity of about 6.4 million tons per year in the middle of 2010,” he says. Another project, the Tunnel Ridge mine, is under construction in Northern Appalachia; it should come on line in late 2011 with a production capacity of about 6 million tons a year.

“With these two mines, we expect to see annual growth of approximately 12 million tons over our current production of roughly 26 million tons a year,” Cantrell explains.

The company also has two development projects in the Illinois Basin and Northern Appalachia, each with about 3 million tons a year each in expected production.

“These projects are currently in the permitting phase, and we will start development when market demand justifies the capital commitment,” the CFO says. “As you can see, with this project pipeline, we continue to anticipate strong growth opportunities for Alliance.”

National Retail Properties is also quite encouraged about its future. Compared to two or three years ago, “There are many fewer competitors with access to capital and the capacity to make new property acquisitions. This creates a good environment for a company like ours,” Habicht says.

With their growth strategies forging ahead, companies such as Alliance Resource Partners and National Retail Properties are better enabled to deliver the total returns that many investors today are looking for.

S&P’s Capital IQ

In addition to distributing total-return data, Capital IQ, a Standard & Poor’s business, delivers other comprehensive fundamental and quantitative research and analysis solutions to over 4,200 investment management firms, investment banks, private equity funds, advisory firms, corporations, and universities worldwide.

Its solutions are based on the Capital IQ Platform, Compustat, ClariFI, and SystematIQ products, and offer an array of powerful applications for desktop research, screening, real-time market data, back testing, portfolio management, financial modeling, and quantitative analysis. For more information, see Capital IQ’s website,