Most investors dream of finding a winning stock that can transform a small investment into a huge future windfall. Stories abound of stocks that have done just that, especially in the technology sector.
However, while well-known tech stocks grab most of the attention, they're not the only ones that have enabled investors to earn massive gains from a small starting position. Three rather surprising long-term winners are REIT Federal Realty Trust (FRT), utility NextEra Energy (NEE -1.50%), and pipeline company Enbridge (ENB 0.78%), which each turned $1,000 into more than $125,000. Here's how they did it.
Generating a high return
NextEra Energy has been a massive wealth creator over the years. Since becoming a holding company in 1984, the combined electric utility and renewable energy producer has grown by leaps and bounds, turning a $1,000 investment at that time into $27,500 in share-price appreciation alone. However, if you add in all the dividends it paid over the years, the total return is a monster $125,000 windfall.
Powering the company's massive total return has been its ability to grow its earnings and dividend at an above-average rate. For example, since 2004, NextEra has grown its adjusted earnings per share (EPS) by an 8.4% compound annual rate, while expanding the dividend at an even faster 9.4% pace.
Despite that high-powered dividend growth, the utility has one of the lowest payout ratios in the sector at 60% of its earnings, well below the 65% peer-group average. That above-average growth rate has given NextEra the power to generate market-smashing total returns as it has more than doubled the return of the S&P 500 over the last decade. That trend appears poised to continue, given the utility's forecast that it can grow its earnings and dividend at a respective 8% and 10% annual rate through at least 2022.
Fueling massive long-term returns
Canadian pipeline-giant Enbridge has been an incredible wealth-creating machine over the years. Investors who pumped $1,000 into its stock roughly four decades ago saw that sum grow into nearly $36,000. Add in the dividends, and the total return balloons to a monster $150,000.
Fueling that market-thumping return has been the company's ability to steadily grow its earnings and dividend. Overall, Enbridge has increased its dividend in each of the last 25 years, with the payout growing at an 11% compound annual rate during that time frame. That helped fuel a 15.8% average annual total shareholder return during that period, well ahead of the S&P 500's 10.6% total return.
Powering that fast-paced growth has been Enbridge's ability to develop and acquire new oil and gas pipelines, gas distribution and storage assets, and renewable power generating assets. Meanwhile, it has plenty of fuel to keep growing and expects to expand its cash flow at a 5% to 7% annual rate through at least 2022 as it continues investing in new energy infrastructure assets.
A dividend growth king
Shopping-center owner Federal Realty Investment Trust has been a wealth creator over the years. The REIT has increased its dividend for 53 consecutive years, putting it in the elite category of a Dividend King. It's the only REIT with that designation and just one of 30 companies overall.
That remarkable consistency has enabled Federal Realty Investment Trust to produce amazing long-term returns. Overall, the REIT has turned a $1,000 investment into more than $26,000 of stock-price appreciation. Add in the dividends, and it's up to an impressive $180,800 windfall.
Driving its ability to create all that value is its focus on owning high-value real estate in the best markets. That's enabled it to consistently increase rent, as well as redevelop its properties as needed into higher and better uses such as adding apartments and offices to desirable locations. It's also allowed it to offset weakness in the retail sector as it pivots its properties toward more in-demand sectors. Because of that, the REIT should be able to keep growing in the coming years as it redevelops additional locations to position them for the future.
Don't discount the power of dividends
NextEra, Enbridge, and Federal Realty have been compounding machines over the years, turning investments as small as $1,000 into massive returns. What's most noteworthy about their gains is that the bulk of their returns came from dividends, and all three companies have steadily grown them over the years. Because of that, investors shouldn't ignore the wealth-creating potential of seemingly boring dividend stocks.