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Tickers in this Article: MMP
This company has grown its dividend 11% a year since 2003. It's also one of my favorite dividend stocks on the market today.

In the uncertain world of investing, a regular stream of dividend payments is the closest thing investors have to a guaranteed return.

We all buy common stocks in anticipation the shares will increase in value at some point, but dividend stocks can provide us with a steady paycheck while we wait for shares to increase in value.

And while it's hard to know what has "real" value in the stock market, dividends are undoubtedly real money. This is why stocks that distribute reliable, recurring dividend payments year after year should form the core of an income investor's portfolio.

And I'll show you exactly why...

Today, speculators often look to make a quick fortune on the next Microsoft -- some fast-growing company operating in an exciting new industry. But it would be misguided to focus entirely on volatile, unproven industries or companies while overlooking the numerous benefits offered by well established dividend-paying companies.

While the current 2% yield offered by the S&P 500 might seem trivial, it would be a huge mistake to dismiss dividends entirely.

In fact, a look back at statistical data shows that nearly half of the market's total returns have come in the form of dividends. Between 1926 and 2012, dividends represented about 42% of the total return delivered by the S&P 500 according to Ned Davis Research.

And dividend-paying stocks don't just provide income, they actually perform much better than their non-paying counterparts too -- through good times and bad.

In fact, Ned Davis Research found that from 1972 through September 30, 2012, U.S.-based dividend paying stocks in the S&P 500 returned 8.7% annually, far exceeding the 1.6% return for non-dividend payers.

 

Better still, investors receive more bang for their buck from most dividend-paying stocks thanks to tax advantages. Until 2003, dividends were taxed as ordinary income. At the time, that could have been as staggeringly high as 38.6%. Capital gains, by contrast, were taxed at a much lower 20% rate.

But legislation that took effect in 2003 applied a uniform 15% tax rate to both dividends and long-term capital gains. And even with the "fiscal cliff" deal struck by Congress in January 2013, this 15% rate was kept in place for most (with the exception being individuals earning more than $400,000 or $450,000 for families, who must pay 20%).

In other words, qualified dividend income, even for filers in the top tax bracket, aren't taxed at the ordinary income tax rate.

The happy side effect to this has been that income investors now retain a much larger chunk of their gains. That's a powerful change for those who reinvest dividends and allow the miracle of compound interest to work its magic.

This continued lower rate has not only lifted the payouts that most income investors receive, but it has also expanded the pool of quality income-paying candidates to choose from.

Given the obvious advantages of dividend-paying stocks, I thought I'd share with you one of my favorite dividend stocks today...

Magellan Midstream Partners (NYSE: MMP).

Simply put, this is a stock every investor should own.

If you're a regular reader of StreetAuthority, or subscribe to my premium newsletter, High-Yield Investing, it should come as no surprise as to why I like Magellan so much. But for those who are unfamiliar, here's a brief recap...

Magellan is a master limited partnership (MLP) that owns and operates the largest refined petroleum product pipeline system in the United States. Its pipelines and terminals transport, store and distribute products such as gasoline, diesel fuel and crude oil. The 9,600-mile system accesses over 40% of the nation's refinery volume, connecting refineries in the Gulf of Mexico to industrial markets in the Midwest.

The partnership has not missed a distribution since initiating payouts in 2001. In fact, distributions have been hiked every quarter, except for three quarters during the
financial crisis when they remained stable.


During the past decade, the distribution has grown a remarkable 11% on average each year. Unlike many MLPs, Magellan's general partner doesn't have distribution incentive rights, and that leaves more cash flow for distribution to public partners like you and me.

Distributions have grown at a robust 7% a year on average for the past five years, and the latest quarterly distribution of $0.532 translates to $2.13 annually for a 3.7% yield.

Distributions are secured by stable fee-based businesses that account for around 80% of operating margins. The partnership is paid by volume handled in its pipelines, storage facilities and terminals. Less than 20% of operating margins are tied to volatile commodity prices. That makes for steady cash flow and distributions.

Growth has been driven by acquisitions and expansions. In the past nine years, Magellan has invested $2.9 billion in acquisitions and expansion projects. To pay for this growth, Magellan typically uses a combination of internally generated cash flow supplemented by debt or equity.

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