Ever heard the saying, "Don't judge a stock by its dividend?" Okay, maybe I made that up, but the sentiment rings true.
Today, I'm making a quick journey back in time to revisit my four highest-conviction stock recommendations from March 2013:
- Google parent Alphabet (GOOG 0.74%) (GOOGL 0.55%)
- Media-streaming veteran Netflix (NFLX -3.92%)
- Robotic surgery expert Intuitive Surgical (ISRG -0.55%)
- Telecom giant Verizon Communications (VZ -0.53%)
And I'll be comparing the dividend-adjusted 10-year returns of this basket of fairly volatile growth stocks to a selection of four well-established dividend powerhouses:
- Retail titan Walmart
- Consumer goods powerhouse Procter & Gamble
- Tobacco products master Altria Group
- Energy behemoth ExxonMobil
It's time to see whether my seemingly risky growth stocks are truly worth the sleepless nights and buckets of antacid over the years, compared to the results of owning tried-and-true dividend giants.
Spoiler alert: This will be a wild ride. Take a seat and buckle up!
Long-term market trends
First, let me show how the general market has fared in the decade right behind us. This picture should speak at least a few hundred words for me:
Despite the tremendous price drops in 2018, 2020, and 2022, the stock market's good years outweighed the bad ones in this time period.
The rather volatile Nasdaq Composite index delivered the highest returns on a $10,000 investment, but reinvested dividends gave this portfolio a modest boost of 11% in this example.
The broader S&P 500 index held the middle ground here, including a 21% additional gain from dividend reinvestments. That works out to an average annual dividend yield of 1.9%.
Finally, the 30 elite stocks in the Dow Jones Industrial Average index brought up the rear in my 10-year investment experiment, but buying more stock with the dividend checks along the way resulted in a 26% higher result. That's the difference an average yield of 2.3% makes.
Long-term dividend champions
The collection of top-notch dividend payers above has a few things in common. These are four no-brainer household names with a shared history of torrential cash flows. They are committed to raising their dividend payouts every year, with the shortest streak of annual payout boosts on this list stopping at 40 years.
Unfortunately, while the quarterly payouts made a big difference, they didn't change the game. All four of these premium-quality dividend payers underperformed the S&P 500 in this study, despite an average annual dividend yield of 3.6%.
If you invested $10,000 in each of these tickers a decade ago (a total investment of $40,000), you'd have $64,140 today from stock price moves alone. With dividend reinvestments active over the whole period, the final tally lands at $92,090 instead. By comparison, $40,000 in a fund that tracked the S&P 500 index over the same time span would be worth $126,960 today, assuming you reinvested those payouts, averaging 4.1% per year.
My dividend champions couldn't keep up with the broader market.
That doesn't make top-quality dividend stocks useless, though. In fact, they can play a very specific and useful role in a diversified portfolio, and they may be exactly the right kind of investment in a certain stage of your lifelong stock picking career.
Hold that thought. I'll get back to it in a minute.
My humble recommendations
But first, here's how the growth stocks I picked 10 years ago have performed since then. Only one of these tickers has ever paid a dividend, boosting Verizon's returns by a total of 58%. This chart just looks a little cleaner and easier to understand if we just stick with the total returns for each ticker:
NFLX Total Return Level data by YCharts
Only Verizon -- the sole dividend-paying stock on this list -- generated lower returns than the S&P 500. The smartphone market was still hot in 2013, but Verizon's mobile growth cooled off over the years. If you followed my advice on Big Red way back when, I hope you had the good sense to get out when T-Mobile US started stealing customers from its larger rivals.
The other three have performed closer to the projections I made in 2013. I thought Intuitive Surgical could double in five years as hospitals around the world adopted its advanced surgical tools. The stock price rose 156% in the next five years and 375% in the full 10-year span that followed.
Alphabet is still the company to beat in online search and advertising services, with healthy revenue contributions from related operations such as the cloud computing platform known as Google Cloud and the massive mobile device family under the Android banner. The business landscape is changing around this company but Alphabet was quite literally created for the purpose of letting the company adapt to unstable markets. Ten years ago, I saw the signs of the radical restructure that would follow two years later, and it looked like a good idea to pursue various "moonshot" business ideas that one day might shoulder the load when online search goes out of style.
As for Netflix, I saw the start of a long growth story -- "Quite possibly decades." So far, so good. Netflix's worldwide video-streaming service has lifted annual revenue from $3.6 billion to $31.6 billion, a 776% increase that now supports generous cash flows and a stock price gain of 1,230%. And I think this long-lasting growth still has many chapters left to go. It is not too late to buy into the Netflix opportunity today, as we're still in the early days of digital media streaming replacing other media formats globally.
In fact, Netflix is still one of my best recommendations for new money in 2023.
Analysis of the results
Who would have thought that the unconventional stock picks would outshine the safe dividend darlings by such a wide margin? It's like discovering a hidden treasure chest in your own backyard! You see, you don't have to hit a home run with every pick when the potential long-term gains from a single winner are this incredible. Verizon's sluggish performance didn't undermine this little four-ticker portfolio by very much.
For example, let's imagine that only Netflix turned out to be a good pick among my four selections from March 2013, and the other three went out of business instead, burning every cent invested in them. A $10,000 Netflix investment would still have edged out a $40,000 S&P 500 bet with every benefit the index's generous dividends could offer.
The final tally of that hypothetical thought experiment: Netflix plus three complete losers would be worth $127,700 while a quadruple S&P 500 investment stops just short at $126,960.
These results highlight the importance of taking calculated risks and not being afraid to venture off the beaten path in search of innovative companies with the potential for explosive growth. I'm a rule breaker at heart and my portfolio will always have a place for volatile risk-takers with huge growth potential.
What are those slow-growing dividend stocks good for, then?
If you can't afford to hit some speed bumps and pot holes along the way, you could be better off with the rock-solid reliability of steady cash machines with generous dividend policies. A portfolio made up of the four dividend-oriented stocks exceeded the single-year returns of the growth tickers in five of the 10 calendar years under my microscope. Last year, for example, the dividend stocks presented a 9.1% gain but my growth stock mini-portfolio took a 45.9% haircut instead.
So if you aren't ready to face a mix of dramatic retreats and unpredictable price jumps, robust dividend stocks should be right up your alley. And in a diversified portfolio, the dividend giants give you a solid platform that lets you sleep at night, even when the growth sector is falling apart again.
