9 Stocks That Prove Dividends Make All the Difference (Update1)

(Story updated to add W.W. Grainger is entering Brazil with an acquisition.)

BOSTON ( TheStreet) -- Some folks think chasing dividends is, well, a bit stodgy and more for the conservative investor or one with retirement coming up.

But dividends can do surprising things to spice up returns over time, thanks to the power of compounding.

That point is proven by S&P Indices' Senior Index Analyst Howard Silverblatt. He reports that the S&P 500 Total Return Index, which includes both stock gains and dividends, reached an all-time high at 2,449.1 Monday, displacing the October 9, 2007, record of 2,447.

The new record represents a rise of 0.1% from peak to peak in roughly 4 1/2 years. And what makes up that gain for the index? Well, the equity value of it is down 9.3%, while the dividend portion returned 9.4%, which means dividend returns kept the index above water.

Put simply, $10,000 invested in the S&P 500 Total Return Index on Oct. 9, 2007, was worth about $10,008 Monday, made up of $9,066 in stock value and $942 in dividends.

With that in mind, I screened Morningstar's database of dividend-oriented funds, including the Vanguard Dividend Appreciation ETF ( VIG), which selects only companies that increase their dividends for 10 consecutive years for its portfolio, to find some of the top-returning, high-quality dividend-paying stocks of the past five years.

The results prove that you don't have to be a dividend drudge or alternately swing for the fences for the latest hot stock to get optimal returns. But, rather, you ought to look for stocks with the potential for steady share-price appreciation coupled with a stable dividend.

I found nine stocks that exhibit that sort of balance, and all more than doubled in value within the past five five years with total returns even better than that of dividend stalwart International Business Machines' ( IBM) 18.3% five-year average total return.

And just as important, they passed dividend fund managers' scrutiny for quality.

As a reference point, a $10,000 investment in IBM shares five years ago would be worth $24,172 today.

The top stock is that of Stepan Co. ( SCL), which has a 29.3% annualized total return over the past five years. That means that $10,000 invested in its stock five years ago would be worth $36,840 today.

And who would have guessed that tiny Bank of the Ozarks ( OZRK ) could also beat out mighty IBM in terms of returns? But it did with an 18.4% five-year average annual total return.

Here are summaries of nine high-quality, steady dividend-paying companies in inverse order of their total returns over the past five years:

9. Bank of the Ozarks ( OZRK)

Company profile: Bank of the Ozarks, with a market value of $1 billion, offers traditional banking services and has about 25 banking offices in Arkansas.

Dividend Yield: 1.38%

Investor takeaway: Its shares are up 8.2% this year and have a five-year, average annual return of 18.4%, so $10,000 invested five years ago would be worth $23,814 now. Analysts give its shares nine "hold" ratings, according to a survey of analysts by S&P.

8. Nordson ( NDSN)

Company profile: Nordson, with a market value of $3.5 billion, manufactures automated equipment used to apply adhesives, sealants, and coatings during manufacturing processes.

Dividend Yield: 0.92%

Investor takeaway: Its shares are up 33% this year and have a five-year, average annual return of 19.3%, which means $10,000 invested five years ago would now be worth $25,114. Analysts give its shares one "buy/hold," rating and seven "holds," according to a survey of analysts by S&P.

7. Raven ( RAVN)

Company profile: Raven, with a market value of $1 billion, is a manufacturer and supplier of industrial products, including flow controls, engineered films, and electronic systems.

Dividend Yield: 1.33%

Investor takeaway: Its shares are up 2.2% this year and have a five-year, average annual return of almost 20%, so $10,000 invested five years ago is now worth $25,312. Analysts give its shares one "hold," rating, according to S&P, which does not have it rated.

6. W.W. Grainger ( GWW)

Company profile: W.W. Grainger, with a market value of $15 billion, is a distributor of maintenance, repair, and operations supplies for businesses and institutions. Grainger said Tuesday that is buying AnFreixo S.A., a business unit of Brazil's Votorantim Group, in order to enter the Brazilian market. AnFreixo, a distributor of maintenance, repair and operating supplies in Brazil, had 2011 sales of $37 million.

Dividend Yield: 1.21%

Investor takeaway: Its shares are up 17% this year and have a five-year, average annual return of 24%, which means $10,000 invested five years ago would now be worth $30,480. Analysts give its shares four "buy" ratings, three "buy/holds," nine "holds," and two "sells," according to a survey of analysts by S&P.

5. TJX Cos. ( TJX)

Company profile: TJX, with a market value of $29 billion, is a leader in off-price retailing with revenue of $22 billion last year. It has about 3,000 stores.

Dividend Yield: 0.96%

Investor takeaway: Its shares are up 24% this year and have a three-year, average annual return of 25%, which means that $10,000 invested five years ago would be worth $31,537 now. Analysts give its shares 13 "buy" ratings, seven "buy/holds," and 11 "holds," according to a survey of analysts by S&P.

4. Polaris Industries ( PII)

Company profile: Polaris, with a market value of $5 billion, manufactures off-road vehicles, including all-terrain vehicles and snowmobiles.

Dividend Yield: 2%

Investor takeaway: Its shares are up 33% this year and have a five-year, average annual return of 26.5%, so $10,000 invested five years ago is now worth $35,191. Analysts give its shares seven "buy" ratings, four "buy/holds," and two "holds," according to a survey of analysts by S&P.

3. Fastenal ( FAST)

Company profile: Fastenal, with a market value of $16 billion, provides building industry and industrial customers with all types of fasteners such as nails and screws as well as general-purpose maintenance, repair, and operations items. With more than 2,600 store and distribution locations, it generated $2.8 billion in revenue in 2011.

Dividend Yield: 1.24%

Investor takeaway: Its shares are up 26% this year and have a five-year, average annual return of 27%, so $10,000 invested five years ago is now worth $33,900. Analysts give its shares three "buy" ratings, seven "holds," one "weak hold," and one "sell," according to a survey of analysts by S&P.

2. Ross Stores ( ROST)

Company profile: Ross Stores, with a market value of $13 billion, is one of the largest off-price retailers of brand-name apparel and home accessories in the U.S. It operates over 1,000 "Ross Dress for Less" stores, and 90 dd's Discounts stores.

Dividend Yield: 0.96%

Investor takeaway: Its shares are up 23.4% this year and have a five-year, average annual return of 28.4%, so $10,000 invested five years ago is now worth $35,710. Analysts give its shares 11 "buy" ratings, three "buy/holds," 15 "holds," and one "weak hold," according to a survey of analysts by S&P.

1. Stepan Co. ( SCL)

Company profile: Stepan, with a market value of $918 million, manufactures a wide range of chemicals with applications in everything from beverages to aircraft materials.

Dividend Yield: 1.24%

Investor takeaway: Its shares are up 13% this year and have a five-year, average annual return of 29.3%, so $10,000 invested five years ago is now worth $36,840. Only one analyst follows it and he gives its shares a "buy" rating, according to S&P.

>>To see these stocks in action, visit the 9 Stocks That Prove Dividends Make All the Difference portfolio on Stockpickr.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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