As a rule of thumb, the S&P 500 doubles once every seven to eight years. If you can consistently find stocks with the potential to double in six years, then you've got a market-beating strategy that can place you well ahead of the pack.
To double in six years requires a compound annual growth rate of 12.3%. While outright growth can achieve this, dividends from more mature companies can also play a crucial role in achieving this level of outperformance. So let's take a look at some dividend stocks that could double in six years.
1. Taiwan Semiconductor
Taiwan Semiconductor (TSM 3.91%) emerged as one of the top semiconductor foundries worldwide. Its cutting-edge processes with 3nm (nanometer) and 5nm chips have given it a key technological edge over many other chipmakers, which has helped power the stock to massive growth.
Unlike other chip companies, Taiwan Semiconductor doesn't market its chips to consumers. Instead, it produces chips for some of the tech leaders like Apple and Nvidia. However, as the electronics market loses steam, the chip industry may be going through a downward phase in its usual cycle.
Still, Wall Street analysts project flat revenue this year and expect it to deliver 21% growth in 2024. While earnings will likely fall this year thanks to a weaker chip market, Taiwan Semiconductor still trades a cheap 15.3 times forward earnings, which uses 2023 projections.
Although the business may be in a downturn now, the chips Taiwan Semiconductor currently produces are still a worthwhile upgrade. Additionally, it's likely working on new technology that will become the next evolution in the chip space.
With the stock sporting a 2% dividend yield, Taiwan Semiconductor is a strong candidate for a company that can outperform the market and double within six years.
2. Prologis
Real estate investment trusts (REITs) are tax-advantaged because they are required to pay out 90% of their earnings as dividends. REITs don't have to pay taxes on the dividends they pay because of this classification, so it provides shareholders with a generous dividend payout. Prologis (PLD 1.30%) is classified as a REIT and focuses on industrial warehouses. If you've seen a distribution center with concrete walls that sprung up seemingly overnight, that's the type of building Prologis owns.However, with warehouses in 28 cities in the U.S. and only in 19 different countires, Prologis has a lot of room for growth.
Image source: Prologis.
The company estimates $2.7 trillion in goods flow through its distribution centers annually, accounting for nearly 3% of the world's GDP. With the current trend of commerce, it's likely that more distribution centers will be needed globally to support e-commerce buildout. With 98% of its buildings occupied during the fourth quarter, it's clear that the market opportunity hasn't been saturated either.
Prologis also issued strong 2023 guidance, with core funds from operation (FFO, a metric REITs utilize to convey earnings better) expected to grow 9.5%. While that may not sound like market-crushing growth, it also pays a respectable 2.8% dividend yield. The growth and dividend combined yield a powerful combination that should fuel the stock to beat the market.
With strong demand for warehouses still present, Prologis has a bright future ahead.
3. Visa
Visa's (V 0.33%) dividend isn't as generous as the others -- it only yields 0.75%. However, its growth potential surpasses Taiwan Semiconductor and Prologis.
Visa's payment processing network is the largest of its kind and processed over $3 trillion in the first quarter of fiscal year 2023 (ended Dec. 31, 2022). From that $3 trillion, it generated $7.9 billion in revenue in the first quarter, indicating it takes about 0.26% of the volume it processes as fees for utilizing its network.
As the world moves to a cashless society, Visa's processed payment volume will continue to grow, giving it the opportunity to expand its reach over the next six years. The stock is also historically cheap when assessed from a price-to-earnings standpoint.
V PE Ratio data by YCharts.
Additionally, Visa has paid a steadily growing dividend over the past 14 years and only pays out about 20% of its free cash flow, indicating management could substantially expand its dividend over the next decade.
Visa is the largest payment processor of its kind, and it's unlikely we will revert to using more cash in the next six years, so Visa will stand to benefit from the shift. With Wall Street analysts projecting 10.4% and 11.1% growth in FY 2023 and 2024, Visa still has plenty of room to grow.
Keep or reinvest the dividends?
All three of these stocks more than doubled over the past six years, stomping the S&P 500. However, choosing to reinvest the dividends in the company instead of taking them paid off big time.
On the bottom of the above chart is what happens when you reinvest the dividends; on the top is if you choose to take them in cash. As you can see, reinvesting the dividends made a huge difference in the performance of all three companies.
If you don't need the cash flows and you believe the stock will outperform in the long run, then reinvesting dividends is a smart move. If I were to take a position in this trio today, I'd reinvest the dividends, as each company still has a bright future ahead.
