If you're a growth investor, it's time to get a lot more boring with your portfolio.
Studies have shown that the real secret to beating the market isn't growth stocks. Contrary to popular belief, the secret to outsized gains lies in dividends.
The respected research firm Ned Davis conducted a study over more than four decades. Their research found that dividend-paying stocks tend to beat the market over the long term and yield far better returns than stocks that don't pay dividends.
The Ned Davis study showed that stocks in the S&P 500 that didn't pay dividends delivered a 2.5% annual return from 1972 through 2015. That would have turned a $1,000 investment into $2,910 over that timeframe.
By comparison, dividend-paying stocks in the S&P 500 returned 9% annually over the same period -- also beating the S&P 500's 7.4% annual return.
In this scenario, a 9% annual return over this period would have turned a $1,000 investment into $43,850.
This might be discouraging if you're a young investor that owns all the FANG (Facebook, Apple, Netflix, Google) stocks. But don't worry, this is a great time to swap out some of those growth stocks for stocks that pay dividends.
Growth Stocks Look Overvalued
Growth stocks have been delivering big returns in 2017. Tesla (Nasdaq: TSLA), for one, is up 54% in just the last six months.
That outsized return is great for current shareholders. However, for future shareholders it's a problem. Tesla has a forward P/E ratio higher than 350, more than 18 times the S&P 500's forward P/E ratio of 19.
That high P/E ratio means investors have already priced in tons of growth for the next ten years, making it more difficult for shares to deliver outsized returns.
And Tesla isn't the only overvalued tech stock. Netflix (Nasdaq: NFLX) has a forward P/ E ratio of 156. Amazon (Nasdaq: AMZN) also has a forward P/E ratio of 156.
Meanwhile, dividend stocks look cheap by comparison. The Vanguard High Dividend Yield Index Fund ETF (NYSE: VYM) has a forward P/E ratio of 18, a discount to the S&P 500's 19.
That's why it's a great time to swap out some growth stocks for stocks that pay quarterly dividends.
Here is a list of seven stocks that have raised their dividend for at least 40 years, the entire span of the study.
7 Reliable Dividend-Growers
|Archer Daniels Midland||ADM||3.1%|
|Procter & Gamble||PG||3.1%|
From this list I have chosen to feature Exxon Mobil and Procter & Gamble because of their high dividend yields and long histories as reliable dividend payers.
Exxon Mobil (NYSE: XOM) is one of the best dividend stocks of all time. This global leader has been paying a dividend for an incredible 135 years. Today, Exxon offers one of the highest dividend yields in the S&P 500. Its current yield of 3.8% is an 80% premium to the S&P's 2.0%.
Looking forward, Exxon shouldn't have any problem growing its dividend. Energy companies have taken huge measures in the last two years to cut expenses and adjust to lower oil prices. Those adjustments are on pace to give earnings a big boost. Exxon is on pace to grow earnings 52% this year and another 14% next year.
Exxon also offers value. Its forward P/E ratio of 21 is a huge discount to the FANG stocks listed above.
Procter & Gamble (NYSE: PG) is another dividend powerhouse. The company has been reliably paying a dividend every year since 1891 and raised its dividend 58 years in a row. Today, it's no surprise that P&G offers one of the highest and most reliable dividends in the S&P 500. Its current yield of 3.1% is 55% premium to the S&P 500's 2.0%.
I also expect P&G to continue raising its dividend. The company is on pace to deliver the steady and reliable earnings growth that has supported its dividend for the last 126 years. Earnings are expected to expand 5% this year and another 6% next year.
You can also get a deal on shares. P&G's forward P/E of 21 is a huge discount compared to the growth stocks above.
Risks To Consider: Dividend stocks have been in favor with investors over the last few years because bond yields have been so low. Even though they are cheap compared to growth stocks, they are still trading with P/E ratios near multi-year highs.
Action To Take: The data shows that dividend stocks have a history of outperforming growth stocks. Growth investors should take note and think about adding a few good dividend stocks to their portfolio. This list above is a great place to start. These are the most reliable dividend payers in the S&P 500.
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