When most investors think of dividend stocks, they think of safe, steady, and reliable stocks of large companies that are more known for their stability and value than their aggressive growth potential. That's because most growth stocks use the excess capital to invest in the company to spur future growth, rather than return it to shareholders in the form of dividends.
But there is one dividend stock in particular that has the potential to do both -- generate high dividend income and produce excellent long-term returns. In fact, it has the potential to double your money in less than six years.
BlackRock and bull markets
BlackRock (BLK 0.69%), the world's largest asset management firm, is one of those stocks with the potential to deliver both high-yielding dividends and strong returns.
First, BlackRock has one of the best dividends in its sector. In August it declared a $5 quarterly dividend, at a yield of about 2.9%, which is above average. This year was the 13th straight year that BlackRock raised its dividend, and it has averaged about a 12% increase over the past five years.
If you look at the stock's performance over the past 10 years, it has posted an annualized return of 9.8% as of Sept. 18, which is slightly below the S&P 500's 10.1% return over that time. But if you reinvested the dividend, it has a 12.7% return over that period, topping the S&P 500's 12.1%.
The key thing to know about BlackRock is that as an asset manager it is cyclical, which means it is impacted by the fluctuations of the overall market. That's because its fund and exchange-traded funds (ETFs) are invested in the market and their asset levels move with it. But because of its market dominance, its status as the leader in ETFs, and its breadth of asset types, BlackRock has generally been able to outperform its peers.
Coming out of a period of market malaise, market watchers generally anticipate a bull market on the horizon, particularly as the Federal Reserve begins to lower interest rates with inflation coming under control. A bull market or rising stock market, particularly one that runs for an extended period, will result in significantly higher returns for BlackRock investors.
If you look at the 2010 bull market, which ran from March 2009 through February 2020, BlackRock posted an average annual return of about 17.6% over the stretch. With the dividend reinvested, it averaged a 20.6% annualized return.
Then from March 2020 through January 2022 (a shorter bull market), it had an average annualized return of 16.8% compared to the S&P 500's 15.2%.
Double your money
BlackRock is a buy right now because of its market dominance and its far-and-away superior leadership position in ETFs, which are expected to see assets grow by between 13% and 17% each year between now and 2027. A recent studyby Oliver Wyman on ETFs within the asset management industry reported that their share of total fund assets would grow from 17% at the end of 2022 to 24% in 2027. BlackRock is in prime position to take advantage of this trend.
And after the 2022 bear market, BlackRock's price-to-earnings ratio of 20 is still reasonable for a stock with such consistent earnings power. Over the last 10 years through June 20, BlackRock has grown earnings by an average of 8.3% on an annualized basis.
If we are indeed headed into a lengthy bull market, BlackRock has shown in the past that it can generate considerably higher returns. If the stock were to generate a 15% return over the next 10 years, for example, you would double that initial $5,000 in about five years.
A $5,000 investment with a 12.7% annual return, which matches BlackRock's return over the past 10 years with its dividend reinvested, would more than double to $10,245 after six years. And if you took the dividend, it would take you under eight years to double the investment, based on BlackRock's average return over the past 10 years of 9.8%. But then you'd have the dividend income to spend, which this year is paying out $20 per share. Over the years, that total would likely rise.
So, BlackRock is one of those stocks that can do two things at once -- generate a good dividend and provide a strong return, especially in a bull market.
