Income investing has an unfair stigma attached to it.

The conventional wisdom says invest in dividend payers — also known as “widow-and-orphan” stocks — if you’re just trying to stash your money somewhere. If you actually want to earn a decent return, then look somewhere else.

Dividend payers are thought to be stodgy. They’re slow movers. They’re boring. They’ll pay you a few percent a year but won’t move anywhere.
That common wisdom couldn’t be further from the truth.

Take a look at this chart:

Yes, that’s an income investment. In fact, I hold Magellan Midstream Partners (NYSE: MMP) in one of my High-Yield Investing portfolios. It pays 4.5% a year. Not too long ago, it was paying 7% before the price rose dramatically. Since April 2009, Magellan’s shares have returned roughly 180%.

But this isn’t some outlier. You can find dozens of income stocks that have experienced the same thing. A quick screen on Bloomberg shows 188 stocks and funds yielding above 5% that also beat the 77% gain of the S&P 500 during the past three years.

Here’s one of those 188 — Crosstex Energy (Nasdaq: XTEX). It’s paying 8.0% in addition to 770% in capital gains during the past three years (the chart below shows the effect of dividends too, which increase the return). The stock was beaten up in the bear market but rebounded nicely:

Risks to Consider: Now, I’m not saying run out an buy either MMP or XTEX — but they help prove a point. No, not every dividend-payer is automatically going to beat the market. Some might not even show a positive return.

Action to Take — > But the school of thought that says dividend stocks are only a place to park money — and not actually see it beat the market — is simply incorrect.