In my last article I talked about some of my ideas on dividend and growth investing. Now, I will pit the two investing styles against each other and have a dividend portfolio compete against a growth portfolio. Each portfolio will have 9 stocks, all similarly weighted. Whichever portfolio has a greater total return by the end of January 2014 will be declared the winner, although if there is still interest I will extend the competition to a later date.
When building each portfolio I will target large-cap, well-known companies, and will try to include multiple industries to add diversification. While I realize that comparing two relatively small portfolios will by no means provide a definitive answer to the question of dividends vs. growth, I believe it is a valuable exercise and will certainly increase understanding for each investing style.
Now let's introduce our players. Since there are 18 stocks going into these two portfolios, I will keep my analysis of each company to a minimum, but I will be happy to provide more info on why I chose each one in the comments below. I am going to assume that all stocks are purchased at their closing price as of January 14, 2013.
While Apple is a new comer to the dividend arena, I believe its ridiculous cash horde and great earnings power will allow it to become a major dividend player going forward. Also, it is trading at a very cheap valuation right now.
British Petroleum (BP)
BP is still trading at a discount to its peers due to the aftermath of the Deepwater Horizon oil spill. As it continues to recover I expect to see increasing earnings and dividends. At its recently increased dividend rate of 54 cents per quarter, the payout ratio is a sustainable 37% of projected 2013 earnings.
The American automaker has already seen a surge in its stock price this year as it finally is showing signs of turning the corner and putting the recession behind it. The recent doubling of the dividend and high levels of hiring show management thinks the outlook is bright.
Walgreen Company (WAG)
Walgreens is another dividend stock that has seen a recent run-up in price. Even at today's level I would want to have a stake in this company with a solid history of increasing earnings and dividends.
Wells Fargo (WFC)
In my opinion Wells Fargo is the best choice bank in the country. While there may be other banks with more upside such as Bank of America (BAC), I am more comfortable owning this less risky player.
Becton, Dickinson, and Co. (BDX)
What's not to like about this about this medical device manufacturer that has a rock solid history growing earnings and dividends?
I am big fan of the changes Wendy's new management team is pushing forward (There are a great series of SA articles detailing their plans written by Thomas Finser). While this may not be the best stock choice for 2013, I love their medium-term outlook.
This beaten down communications company is my turn-around pick, and is admittedly a riskier choice for inclusion in this portfolio. Once again I like the management team at PBI (you may be starting to sense a trend here) and think that their new CEO and former IBMer Marc Lautenbach will be able to guide PBI through this rough stretch.
American Capital Agency (AGNC)
No matter how you look at it, mReits are going to have a tougher time going forward thanks to narrowing interest spreads. However I believe AGNC is well-positioned to weather the storm and continue dishing out double-digit or high single digit yields to its owners.
This internet behemoth continues to fire on all cylinders, forecasting another year of +15% earnings growth for 2013.
While some of CEO Reed Hastings' past decisions have been less than ideal, the continuing regulatory focus on cutting down on internet piracy bodes well for streaming content providers. If investments in Europe and South America pan out Netflix will be well positioned for future growth.
General Motors (GM)
Big share gains in China and a hot product pipeline bode well for GM.
The largest online retailer in the world continues to defy all earnings-based valuation logic and keeps hitting new all-time highs. As long as the market keeps rewarding their impressive revenue growth, this stock will continue is bullish run.
Boston Beer Co. (SAM)
The maker of Sam Adams has had an impressive run of earnings growth, with nearly a 40% 5-year EPS growth average. Considering their lofty valuation, they will need to continue to impress in order to keep the stock price moving up.
Buffalo Wild Wings (BWLD)
This nationwide sit-down restaurant chain looks to continue its trend of +15% earnings growth. If the general economy improves as expected, look for improved same-store sales to help the bottom line.
Berkshire Hathaway Inc. (BRK.B)
It's hard to go wrong investing in Warren Buffet's flagship company, especially when it is trading at a historically low price-to-book ratio.
Will the recent boost from improved mobile monetization continue to fuel this stock's rise?
Chipotle Mexican Grill (CMG)
This restaurant chain has shown impressive growth, but the stock price has been beaten down due to a downtrend in same-store sales numbers.