Dividends Vs. Growth, Part III: And The Winner Is...

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 |  Includes: FTA, IVE, IVW, RPG, RPV, SPYG, SPYV, VOOG, VOOV
by: Ryan Schroeder

At the beginning of last year I wrote two articles comparing dividend and growth investing. The first article was on the theory, you can find it here. The second article was a portfolio challenge, where I picked a portfolio of dividend stocks to compete with a portfolio of growth stocks. Here is the link to that article.

These were actually two of the first articles I wrote for Seeking Alpha. Then and now, my personal investing focus is on dividend stocks (preferably dividend growth stocks), but I wanted to take a look at the other side of the investing story as well. Here are the results of the portfolio challenge:

Growth Portfolio: Google (NASDAQ:GOOG), Netflix (NASDAQ:NFLX), General Motors (NYSE:GM), Amazon (NASDAQ:AMZN), Boston Beer (NYSE:SAM), Buffalo Wild Wings (NASDAQ:BWLD), Berkshire Hathaway (NYSE:BRK.B), Facebook (NASDAQ:FB), and Chipotle (NYSE:CMG)

Company

Purchase Price

Shares

Current Price

Total

Change

GOOG

$723.25

2

$1,141.23

$2,282

57.79%

NFLX

$103.44

15

$340.99

$5,115

229.65%

GM

$30.33

50

$40.40

$2,020

33.20%

AMZN

$272.73

6

$401.20

$2,407

47.11%

SAM

$138.56

12

$226.40

$2,717

63.39%

BWLD

$75.03

20

$151.49

$3,030

101.91%

BRK.B

$95.36

15

$115.34

$1,730

20.95%

FB

$30.96

50

$58.28

$2,914

88.24%

CMG

$295.97

5

$535.85

$2,679

81.05%

Total Portfolio:

$13,773

$24,894

80.75%

Click to enlarge

I must say, when I was putting these numbers together, I had to shake my head a few times. Here was a growth portfolio that I threw together, not from extensive research, but just by picking what I considered to be "popular" growth stocks that most people would know about. 2013 was a fantastic year for this portfolio. Its 1 year return was 80.75%. If I could put together a portfolio that could pull that off for a few years in a row, then I'd have a serious change of retiring before 40. Unfortunately for me, I don't own any of these stocks. Hence my earlier head shaking.

Dividend Portfolio: Apple (NASDAQ:AAPL), BP (NYSE:BP), Ford (NYSE:F), Walgreens (WAG), Wells Fargo (NYSE:WFC), Becton Dickinson (NYSE:BDX), Wendy's (NYSE:WEN), Pitney Bowes (NYSE:PBI), American Capital Agency (NASDAQ:AGNC)

Company

Price

Shares

Current Price

Total

Change

AAPL

$501.75

3

$543.46

$1,630

8.31%

BP

$44.34

35

$48.73

$1,706

9.90%

F

$13.99

105

$15.54

$1,632

11.08%

WAG

$39.04

40

$59.36

$2,374

52.05%

WFC

$34.77

45

$45.92

$2,066

32.07%

BDX

$82.30

20

$111.08

$2,222

34.97%

WEN

$4.85

300

$8.41

$2,523

73.40%

PBI

$11.74

125

$23.69

$2,961

101.79%

AGNC

$31.05

50

$19.87

$994

-36.01%

Total Portfolio

$13,773

$18,108

31.47%

Click to enlarge

Now for the dividend portfolio, which more closely matches my real-life holdings. All in all it was a good year for this portfolio as well, albeit nowhere near as impressive as the growth portfolio. After adding in the $658 of dividends this portfolio earned, its total return was 36.24%. The major laggard for the portfolio was AGNC, which like most mREITs, had a very difficult year dealing with fluctuating rates and book value declines.

2013 was undoubtedly the year of the growth stock. This is to be expected when the market as a whole is very bullish. That is the nature of growth stocks. When sentiment is positive and there are blue skies on the horizon, growth stocks tend to perform better than dividend stocks. There are two reasons for this. The first is they are plowing a much higher percentage of their revenues back into the company. This drives further revenue growth and, if managed well, profit growth, which is what will drive the stock price forward in the long run. When the economy is improving, as it has been since 2010, there are simply more growth opportunities out there, which these companies can take full advantage of. The second reason is P/E expansion. When investors see a few years of impressive 20%-30% growth (revenue or earnings) they deservedly reward the company with a higher PE.

That is the situation we find ourselves now. Personally I think a lot of these growth stocks are overvalued at the moment, as many of them are sitting on some pretty astronomical P/E's. Could they go even higher? No doubt. But the margin of safety just isn't there. So even after witnessing this impressive run and seeing the profits I "missed out" on, I am perfectly content with not owning any of those high flying growth stocks. I thoroughly enjoy receiving growing dividend checks every quarter without needing to think or worry about short term price movements. Knowing when to sell is the number one challenge of owning growth stocks, and is the reason I joined the DGI bandwagon. NFLX is the perfect example. Since 2011, it has gone from the $280's down to the $50's, and all the way back up to the high $300's. That kind of roller coaster action just isn't for me. I have enough to worry about aside from deciding whether NFLX is a good buy at P/E of 200. If I want to gamble, I'll just go to casino.

In the end, this was a fun exercise for me, and I think I will continue the challenge with these two portfolios in 2014. I'm not expecting to see anywhere near the returns as last year, but it will definitely be interesting to watch.

Disclosure: I am long AAPL, WEN, F, BP, AGNC, WFC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.