4 Hyper-Growth Blue Chips That Yield 4.1% And Can Help You Retire Rich

Oct. 27, 2021 11:44 PM ETAMZN, META, BTI, MMP18 Comments26 Likes

Summary

  • The FAANG stocks have delivered 44% CAGR returns for eight years, crushing the S&P by 7X. Today FAANG is 31% overvalued relative to their own 7-year average valuations.
  • FAANNG-M, consisting of FB, AMZN, AAPL, NFLX, NVDA, GOOG, and MSFT are expected to deliver 15.1% CAGR risk-adjusted expected returns over the long-term.
  • However, high valuations mean risk-adjusted returns of just over 10% for the next five years. However, AMZN and FB are highly undervalued FAANG stocks that are expected to soar.
  • Combining AMZN and FB with BTI, and MMP, the highest safe yielding blue chips on Wall Street, creates a 4.1% yielding portfolio with 14.3% growth, and 18.4% long-term consensus return potential.
  • The long-term risk-adjusted expected return is about 12.9%, nearly 2X that of the S&P 500, while you enjoy more than 3X the safer yield.
  • This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Learn More »
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The so-called FAANNG-M stocks consisting of Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Nvidia (NVDA), Google (GOOG) (GOOGL), now Alphabet, and Microsoft (MSFT) have become the growth darlings of Wall Street.

And it's not hard to see why. The average long-term growth consensus is 21.6% for these seven growth legends, which is nearly 3X the 8.5% CAGR analysts expect from the S&P 500 in the future.

Company Yield Growth Consensus Long-Term Consensus Total Return Potential Weighting Weighted Yield Weighted Growth Weighted Total Return Potential

Conservative Risk-Adjusted Expected Return

AMZN 0.0% 29.6% 29.6% 14.3% 0.0% 4.2% 4.2% 20.7%
FB 0.0% 20.00% 20.0% 14.3% 0.0% 2.9% 2.9% 14.0%
GOOG 0.0% 17.00% 17.0% 14.3% 0.0% 2.4% 2.4% 11.9%
NFLX 0.0% 32.20% 32.2% 14.3% 0.0% 4.6% 4.6% 22.5%
MSFT 0.8% 12.10% 12.9% 14.3% 0.1% 1.7% 1.8% 9.0%
NVDA 0.1% 21.80% 21.9% 14.3% 0.0% 3.1% 3.1% 15.3%
AAPL 0.6% 18.60% 19.2% 14.3% 0.1% 2.7% 2.7% 13.4%
Total 26.4% 338.4% 364.8% 100.0% 0.2% 21.6% 21.8% 15.3%

(Source: DK Portfolio Construction Tool) - coming Thursday, October 28th

Analysts expect 21.8% CAGR long-term returns from FAANNG-M, which works out to 15.3% CAGR risk-adjusted expected returns.

This factors in the historical probability of companies not growing as expected, or even going bankrupt over time.

Of course, that also assumes an infinite time frame from which excessive valuations can cancel out. FAANNG-M is 31% historically overvalued, relative to itself, over the last seven years.

That's compared to 27% overvalued for the S&P 500 according to JPMorgan (JPM).

In other words, over the next 5 years, investors in FAANNG-M could expect about 0.2% yield + 21.6% growth - 7.2% CAGR valuation drag = 14.6% CAGR. The risk-adjusted expected return is still an impressive 10.7% CAGR, at least compared to the S&P 500.

S&P 500 2023 Consensus Total Return Potential

S&P 500 2023 Consensus Total Return Potential(Source: FAST Graphs, FactSet Research)

S&P 500 2026 Consensus Total Return Potential

S&P 500 2026 Consensus Total Return Potential(Source: FAST Graphs, FactSet Research)

Year Upside Potential By End of That Year Consensus CAGR Return Potential By End of That Year

Probability-Weighted Return (Annualized)

2021 -23.99% -75.60% -56.70%
2022 -15.69% -13.32% -9.99%
2023 -7.08% -3.29% -2.47%
2024 2.21% 0.69% 0.52%
2025 12.28% 2.80% 2.10%
2026 23.22% 4.10% 3.32%

(Source: DK S&P 500 Valuation And Total Return Tool)

Double-digit risk-adjusted returns that could beat the S&P 500 by 3X might make it seem that FAANNG-M is the only investment strategy you should use.

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential

Long-Term Risk-Adjusted Expected Return

FAANNG-M 0.2% 21.6% 21.8% 15.3%
High-Yield 2.8% 11.2% 14.0% 9.8%
Value 2.1% 11.9% 14.0% 9.8%
High-Yield + Growth 1.7% 11.0% 12.7% 8.9%
Safe Midstream 6.1% 6.2% 12.3% 8.6%
Chinese Tech 0.3% 12.0% 12.3% 8.6%
Safe Midstream + Growth 3.3% 8.5% 11.8% 8.3%
Nasdaq (Growth) 0.7% 10.9% 11.6% 8.1%
Dividend Aristocrats 2.3% 8.9% 11.2% 7.9%
REITs + Growth 1.8% 8.9% 10.6% 7.4%
S&P 500 1.4% 8.5% 9.9% 7.0%
REITs 3.0% 6.9% 9.9% 6.9%
60/40 Retirement Portfolio 1.7% 5.1% 6.8% 4.8%

(Source: Morningstar, FactSet Research)

When analysts are forecasting such remarkable risk-adjusted returns from FAANNG-M and recent returns have been this hot, you can see why some investors think that valuations don't matter, dividends don't matter, bonds and cash don't matter, nothing matters except red-hot growth.

FAANNG-M Total Returns Since 2013 (Annual Rebalancing)

FAANNG-M Total Returns Since 2013

FAANNG-M portfolio growth

FAANNG-M portfolio analysis

(Source: Portfolio Visualizer)

FAANNG-M delivered very consistent 40% CAGR returns over the last eight years, resulting in 20X inflation-adjusted returns that beat the S&P 500 (which is 25% FAANNG-M) by 600%.

These are literally Joel Greenblatt-like returns, and double what Buffett delivered at Berkshire (BRK.A) (BRK.B) for 55 years becoming the greatest long-term investor of all time.

Valuation for long-term stock returnsHowever, as hard as it is for FAANNG-M investors to believe, valuations do matter and they matter a lot.

Blue chips always revert to fair value, though that fair value does change over time.

So let's use Joel Greenblatt's "Magic formula that beats the market" to analyze FAANNG-M, through two different methods.

As I'll now show, Amazon and Facebook are two FAANNG-M hyper-growth blue chips set to soar, and the rest are overvalued and should be ignored...for now.

Joel Greenblatt's Magic Formula

Joel Greenblatt is one of the greatest investors in history, delivering 40% CAGR returns for 21 years at Gotham Capital.

Name Returns Time Horizon

Most Famous For

Jim Simons (Co-Founder Renaissance Technologies) 71.8% CAGR 1994 to 2014 (best investing record ever recorded)

Pure Quant Based Investing

Joel Greenblatt 40% CAGR 21 years at Gotham Capital

"Above-Average Quality Companies At Below-Average Prices"

George Soros 32% CAGR 31 years

Valuation mean reversion, "Reflexivity" = Opportunities can be found by carefully studying the value and the market prices of assets

Peter Lynch 29.2% CAGR at Fidelity's Magellan Fund 1977 to 1990 (13 years)

"Growth At A Reasonable Price"

Bill Miller (Legg Mason Value Trust 1990 to 2006) 22.8% CAGR and beat the S&P 500 for 15 consecutive years 16 years
Warren Buffett 20.8% CAGR at Berkshire 55 Years

Greedy when others are fearful

Benjamin Graham 20% CAGR vs 12% S&P 500 1934 to 1956 (22 years) Margin of Safety
Edward Thorp 20+% CAGR over 30 years

invented card counting, pure statistically-based investing

Charlie Munger 19.80% 1962 to 1975

Wonderful companies at fair prices

Howard Marks 19% CAGR Since 1995

Valuation Mean Reversion

Anne Scheiber 18.3% CAGR 50 years

Turned $5K into $22 million with no formal training, purely with tax-efficient buy and hold blue-chip investing.

John Templeton 300% from 1939 to 1943, 15.8% CAGR from 1954 to 1992 38 years Market Cycles
Carl Icahn 14.6% CAGR vs 5.6% S&P 500

2001 to 2016 (15 Years)

David Swenson 13.9% CAGR at Yale's Endowment (includes bonds and alternative assets) vs 10.7% S&P 500 30 years

Alternative Asset Allocation

Larry Puglia 12.1% CAGR vs 10.2% CAGR S&P 500 28 years running TROW's flagship blue-chip fund

Pure blue-chip/wide moat focus.

Geraldine Weiss 11.2% vs. 9.8% S&P 500 37 years

Best risk-adjusted track record of any newsletter over 30 years according to Hubbert Financial Digest, popularized dividend yield theory (the only strategy she employed)

While the exact method he used to achieve that is proprietary, the basics of his approach were dead simple.

We're buying above-average quality companies at below-average prices". - Joel Greenblatt

The basic Magic Formula which has performed very well over time (and some of its modified versions even better) is this.

  • sort companies by quality and rank them
  • sort companies by valuation and rank them
  • buy the companies that deliver the best combination of quality and value

Greenblatt's favorite proxy for quality was return on capital, annualized pre-tax income/the money it takes to run the business.

His favorite valuation metric was EV/EBITDA, the "acquirer's multiple" that private equity and corporations use when making acquisitions. The Magic formula he outlined in his two books used earnings yield, the inverse of the PE, for simplicity.

FAANNG-M Run Through Greenblatt's Magic Formula

Company 13-Year Median Return On Capital Rank EV/EBITDA Rank Magic Formula Total Points
Apple 271.70% 2 20.6 3 5
Facebook 107.84% 5 13.4 1 6
Microsoft 135.56% 3 24.5 5 8
Alphabet 74.42% 6 17.7 2 8
Netflix 285.31% 1 46.3 7 8
Nvidia 118.76% 4 39.8 6 10
Amazon 14.56% 7 24.1 4 11
Average 144.02% 26.63

(Source: DK Research Terminal)

Based on the Magic Formula Apple actually comes out on top, followed by Facebook, and Microsoft.

The 26.6 average EV/EBITDA of FAANNG-M represents an EV/EBITDA PEG of 1.23 which is actually not that far from Peter Lynch's PEG 1 "growth at a reasonable price".

Apple's EV/EBITDA PEG ratio is 1.1, indicating that, based on its mountain of cash, if it's able to sustain 18.6% CAGR growth over time, the current consensus, then it may not actually be as overvalued as it initially appears.

Of course, growing earnings 134% every 5 years, for the long-term, is a big ask from a company of Apple's size, and basically means that Apple is priced for perfection, and nothing ever going wrong again.

What about Amazon being the worst FAANNG-M under the Magic formula? Didn't I just recommend this company as the single best Buffett-blue you could buy?

Yes, I did, and thanks to a more capital intensive business model Amazon's 13-year median returns on capital are far below the 144% average of FAANNG-M.

Year FCF Margin EBITDA Margin EBIT (Operating) Margin Net Margin Return On Capital Expansion

Return On Capital Forecast

2020 8.0% 14.8% 5.9% 5.5% 2.22
2021 4.7% 15.2% 6.3% 5.6% TTM ROC 23.8%
2022 8.9% 16.0% 7.4% 6.2% Latest ROC 21.5%
2023 10.9% 17.0% 8.9% 7.4% 2026 ROC 52.9%
2024 13.8% 19.1% 10.5% 8.8% 2026 ROC 47.7%
2025 15.5% 20.6% 12.1% 10.1% Average 50.3%
2026 16.5% 22.2% 14.0% 11.7% Industry Median 19.2%
Annualized Growth 12.77% 6.93% 15.36% 13.37% AMZN/Peers 2.62
Vs S&P 3.67

(Source: FactSet Research Terminal)

However, Amazon's profitability is actually in the 96th percentile of its industry and its ROC is expected to grow so rapidly that by 2026 it's expected to be more than 3X the current 13-year median.

In other words, the Magic Formula is not a perfect model, by any means. In fact, none are.

All models are wrong, but some are useful." - British statistician George E.P Box

Over the years many analysts have modified Greenblatt's magic formula (including Greenblatt himself) and here is how I would alter it.

Dividend Sensei's Magic Formula

There is more to quality than just profitability.

The Dividend King's overall quality scores are based on a 207 point model that includes

  • dividend safety

  • balance sheet strength

  • short and long-term bankruptcy risk

  • accounting and corporate fraud risk

  • profitability and business model

  • growth consensus estimates

  • cost of capital

  • long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters'/Refinitiv and Just Capital

  • management quality

  • dividend friendly corporate culture/income dependability

  • long-term total returns (a Ben Graham sign of quality)

  • analyst consensus long-term return potential

It actually includes over 1,000 metrics if you count everything factored in by 12 rating agencies we use to assess fundamental risk.

  • credit and risk management ratings make up 38% of the DK safety and quality model

  • dividend/balance sheet/risk ratings make up 77% of the DK safety and quality model

How do we know that our safety and quality model works well?

During the two worst recessions in 75 years, our safety model predicted 87% of blue-chip dividend cuts during the ultimate baptism by fire for any dividend safety model.

And there is more to valuation than just a single metric, even the favorite metric of private equity, corporations, and Joel Greenblatt. There are dozens of valuation metrics you can use, and our valuation model uses a harmonic average fair value for many valuation metrics including

  • price/sales
  • price/book (for most financials)
  • dividend yields (5, 13, and 25 years)
  • earnings
  • owner earnings
  • operating cash flow
  • free cash flow
  • EBITDA
  • EBIT

We then use a 12-month forward average fair value to estimate how a company is trading relative to its market-determined historical fair value during periods of similar growth rates and other fundamentals (such as similar regulatory and interest rate environments).

Company Discount To Historical Valuation Rank Quality Score Rank

DS Magic Formula Points

Amazon 34.68% 1 81% 4 5
Microsoft -56.97% 5 90% 1 6
Alphabet -7.70% 3 84% 3 6
Facebook 22.69% 2 80% 5 7
Nvidia -70.96% 6 86% 2 8
Netflix -46.03% 4 74% 7 11
Apple -90.21% 7 76% 6 13

(Source: DK Research Terminal)

Amazon and Facebook are the only FAANNG-M companies trading at attractive valuations that sufficiently compensate for each company's complex risk profiles.

Microsoft scores particularly high thanks to its incredible quality, which is a function of both a AAA credit rating, the 4th best long-term risk management consensus on the DK 500 Master List, and of course, one of the safest dividends on earth.

Yet it's still extremely overvalued, relative to the Satya Nadella era, and only expected to deliver 9% CAGR risk-adjusted long-term returns.

In other words, I would never actually buy Microsoft or recommend anyone buy it today. Not unless 9% long-term returns and a multi-year potential bear market is something you're comfortable with.

Zen Phoenix: High Yield, Fast-Growth, And Life-Changing Return Potential

For all my new savings going forward, I am using the new DK Zen Phoenix strategy.

  • Zen Phoenix: always buy growth with yield and yield with growth
  • always at fair value or better
  • and always focusing on safety and quality first and sound risk management always
  • balance in all things that matter (safety, quality, risk management, yield, growth, and value)

Basically, almost no blue-chip on earth is perfect in all things, to all investors. Every blue-chip will have a weakness, and that's where offsetting one company's weakness with another's strength can deliver life-changing income, growth, and returns.

Amazon and Facebook currently yield zero. For many retirees, that's a problem, even a potential dealbreaker.

Phoenix Watchlist Sorted By Highest Safe Yield

 Phoenix Watchlist Sorted By Highest Safe Yield

(Source: DK Research Terminal)

  • green = potentially good buy or better
  • blue = potentially reasonable buy
  • yellow = hold
  • red = potential trim/sell

Sort the Phoenix list, the only watchlist any DK portfolio or my $1.7 million retirement portfolio are using, by yield and you can instantly find the maximum safe blue-chip yield on Wall Street.

So take a look at what happens if we take Amazon and Facebook and combine it with equal amounts of British American Tobacco (BTI), and Magellan Midstream Partners (MMP), the two highest-yielding blue chips on Wall Street.

Company Yield Growth Consensus Long-Term Consensus Total Return Potential Weighting Weighted Yield Weighted Growth Weighted Total Return Potential

Conservative Risk-Adjusted Expected Return

AMZN 0.0% 29.6% 29.6% 25.0% 0.0% 7.4% 7.4% 20.7%
BTI 8.2% 4.2% 12.4% 25.0% 2.1% 1.1% 3.1% 8.7%
Magellan Midstream 8.1% 3.40% 11.5% 25.0% 2.0% 0.9% 2.9% 8.1%
FB 0.0% 20.00% 20.0% 25.0% 0.0% 5.0% 5.0% 14.0%
4.1% 14.3% 18.3% 12.9%

(Source: DK Portfolio Construction Tool) coming October 28th

Now we have a 4.1% safe yield, 14.3% growth, and 18.3% CAGR long-term consensus return potential.

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential

Long-Term Risk-Adjusted Expected Return

Safe Midstream 6.1% 6.2% 12.3% 8.6%
AMZN, FB, BTI, MMP 4.1% 14.3% 18.4% 12.9%
Safe Midstream + Growth 3.3% 8.5% 11.8% 8.3%
REITs 3.0% 6.9% 9.9% 6.9%
High-Yield 2.8% 11.2% 14.0% 9.8%
Dividend Aristocrats 2.3% 8.9% 11.2% 7.9%
Value 2.1% 11.9% 14.0% 9.8%
REITs + Growth 1.8% 8.9% 10.6% 7.4%
60/40 Retirement Portfolio 1.7% 5.1% 6.8% 4.8%
High-Yield + Growth 1.7% 11.0% 12.7% 8.9%
S&P 500 1.4% 8.5% 9.9% 7.0%
Nasdaq (Growth) 0.7% 10.9% 11.6% 8.1%
Chinese Tech 0.3% 12.0% 12.3% 8.6%

(Source: Morningstar, FactSet Research)

How does a 12.9% CAGR risk-adjusted expected returns are almost 2X that of the S&P 500, along with a very safe yield that's more than 3X that of the market sound?

To me, this sounds like one of the best high-yield dividend growth strategies on Wall Street, and the stuff rich retirements are made of.

AMZN, FB, BTI, MMP Total Returns Since 2013 (Annual Rebalancing)

The future doesn't repeat, but it often rhymes" - Mark Twain

Past performance is no guarantee of future results, but studies show that blue chips with relatively stable fundamentals over time offer predictable returns based on yield, growth, and valuation mean reversion.

But let's see how these four blue chips performed over the last eight years. Note that BTI and MMP were overvalued in 2013 so these are not the high-yield blue chips we would have paired with AMZN and FB at the time.

AMZN, FTI, BTI, MMP portfolio

AMZN, FTI, BTI, MMP portfolio growth

AMZN, FTI, BTI, MMP portfolio analysis

(Source: Portfolio Visualizer)

The point I'm trying to make here is that even with half the portfolio in a bear market pretty much the entire time, hyper-growth blue chips purchased at reasonable to attractive valuations in 2013 allowed this portfolio to deliver 50% better inflation-adjusted returns than the S&P 500.

And that's in one of the hottest bull markets in US history.

This is how you can have your dividend cake and eat it too.

This is how you can minimize market envy with either high-yield investments or hyper-growth investments.

This is how you can get paid to make Buffett-like returns from blue-chip bargains hiding in plain sight.

On Wall Street, prudent investors pay others to make them rich. Smart investors get paid to let skilled, adaptable, and trustworthy management teams make them rich.

This is the power of Zen Phoenix in action.

It's not a "get rich quick" scheme, or speculation. It's simply disciplined financial science, focusing on safety and quality first, and prudent valuation and sound risk management always.

In other words, achieving generous, safe, and steadily growing income in all economic and market conditions, as well as life-changing long-term returns, isn't magic, it's just math.

And that's what I've dedicated my life to teaching regular investors like you. How to safely retire rich, and stay rich in retirement by making your own long-term luck on Wall Street.

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This article was written by

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Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.


The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).


I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.


My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.


With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.


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Disclosure: I/we have a beneficial long position in the shares of AMZN, FB, BTI, MMP either through stock ownership, options, or other derivatives. 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.

Additional disclosure: Dividend Kings own AMZN, FB, BTI, and MMP in our portfolios.

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