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Introduction
I have little doubt that most of my regular readers know that I'm all about dividends. I have invested more than 90% of my net worth in dividend (growth) stocks and written countless articles on the dividend stocks in my portfolio and on my watchlist.
Earlier this month, I wrote an article on my personal dividend growth portfolio titled "Here It Is! My 20-Stock 6-Figure Market-Beating Dividend Portfolio."
That said, there's a special reason why I'm writing this article. The other day, I was part of a (German) Twitter/X Space, which is more or less a live podcast. The theme of the Space was "dividend investing."
I'm bringing this up because I discussed the power of dividend (growth) investing.
After writing countless articles on specific investments, I wanted to take a step back and start at the beginning.
Hence, this article is dedicated to the reasons that make dividend (growth) investing so special.
In the second part of this article, I'll present a "near-perfect" model portfolio.
This portfolio:
- Has beaten the market on a very consistent basis.
- Outperformed the market with lower volatility and less severe corrections during recessions.
- Comes with consistent dividend growth and a decent yield.
- Consists of a mix of well-diversified companies with wide moats and healthy balance sheets.
- Provides food for thought for dividend investors.
So, without further ado, let's get right to it!
The Power Of Dividend Investing
Dividends are important - very important.
Did you know that since 1960, 85% of the cumulative total return of the S&P 500 came from dividends?
Bear in mind that the total return consists of capital gains and dividends - the only way we can directly (ignoring options and other derivates) benefit from stocks.
Using Hartford data, a $10,000 investment in 1960 in the S&P 500 has turned into $5.1 million at the end of 2023. Without dividends, that number would have been less than $800 thousand!
Hartford Funds
What's interesting is that the contribution of dividends varies a lot.
As we can see below, the 2010s and the 2020s (to date) have seen a very muted contribution from dividend stocks of just 17% and 15%, respectively.
Before the 1990s, dividends played a much bigger role.
Hartford Funds
This also explains why a lot of younger investors do not really care for dividends.
They prefer to invest in growth stocks like the FANG+ basket. At least, that's what I'm observing.
It's Time For A Dividend/Value Comeback
I believe there is one major reason for that. The 2010s and early 2020s saw huge tailwinds for growth stocks.
- Inflation was subdued in this period, which makes it more attractive to discount future growth.
- Globalization was strong. This benefitted inflation as well.
- While we saw wars in the Middle East, the overall geopolitical picture was not nearly as stressed as the one we're currently dealing with.
- Because of low inflation, major central banks kept rates low, which fueled growth stocks even further.
- We had much more favorable energy/commodity demand/supply dynamics. This, too, benefitted low inflation.
- The internet and automation came with massive productivity gains. Again, that's highly beneficial for inflation.
Federal Reserve Bank of St. Louis
I expect these good times to be over, as I have written in a number of articles, including this one.
- Energy (oil, gas, and coal) supply growth has slowed dramatically. Demand remains strong.
- Labor markets are seeing structural shortages.
- We are witnessing de-globalization.
- Geopolitics have become a hot mess, with dangerous developments in East Europe, the Middle East, and potentially Asia.
- Major developed economies are dealing with elevated debt loads, which may result in governments trying to inflate their way out of these debt loads (as discussed in this article).
This bodes very well for value/dividend stocks.
Even better, as we can see below, value stocks are extremely attractive compared to growth stocks - and more likely to outperform in case interest rates remain elevated.
JPMorgan
With all of this said, I have shown you that dividend stocks are, historically speaking, the best way to invest and that I expect them to outperform in the years ahead.
I have left out one major thing.
What Makes Dividend (Growth) Stocks So Powerful?
When buying dividend stocks, I prefer stocks that consistently raise their dividends.
Historically speaking, these stocks come with both higher returns and lower risks! In other words, we don't need to take sky-high risks to beat the market.
I would even make the case that the higher the risk, the higher the probability someone is going to underperform the market. This is mainly based on risky assets coming with high volatility and business risks.
For example, a startup may turn into a 10-20x bagger. However, it could also go bust.
If one stock goes bust, you need another stock to double just to break even (assuming equal weight exposure).
Looking at the Nuveen chart below, we see that between 1973 and 2023, dividend growers have returned slightly more than 10% per year, beating dividend payers, non-dividend-paying stocks, and dividend cutters by a wide margin.
Nuveen
Even better, dividend growers had the lowest standard deviation.
So, why are dividend growth stocks so great?
Essentially, there are two key reasons for that:
- Strong financials and business models: Companies that can consistently raise their dividends typically have healthy finances, stable earnings, and a strong competitive advantage. This allows them to generate excess cash they can return to shareholders through dividends. Or, to put it differently, they have proven they can withstand the test of time.
- Management discipline: A company's decision to raise its dividend reflects a commitment to shareholder returns. This suggests that management is focused on long-term growth and profitability. After all, if you manage a company with a consistent track record, the focus shifts automatically to sustainable long-term growth.
The Market-Beating Portfolio
As I wrote in the introduction, I am going to present a portfolio of high-quality stocks. These come with fantastic wide-moat business models, well-covered and consistently rising dividends, healthy balance sheets (all are investment-grade, ignoring two without ratings), and the ability to outperform the market on a consistent basis.
From this list, I only own Union Pacific, Northrop Grumman, PepsiCo, Home Depot, and Caterpillar. All other stocks are on my watchlist. The dividend data is provided by Seeking Alpha. The credit ratings are from S&P Global (SPGI).
| Company | Industry | Dividend Yield | 5Y CAGR | Payout Ratio | S&P Credit Rating |
| Watsco Inc (WSO) | Machinery, Equipment & Components | 2.60% | 10.50% | 71.70% | - |
| Waste Management Inc (WM) | Professional & Commercial Services | 1.50% | 3.30% | 45.20% | A- |
| Equity LifeStyle Properties Inc (ELS) | Residential & Commercial REIT | 3.10% | 10.00% | 66.00% | - |
| Union Pacific Corp. (UNP) | Freight & Logistics Services | 2.20% | 10.10% | 50.40% | A- |
| PepsiCo Inc (PEP) | Beverages | 3.00% | 6.40% | 64.90% | A+ |
| Northrop Grumman Corp. (NOC) | Aerospace & Defense | 1.70% | 9.30% | 31.50% | BBB+ |
| Chevron Corp (CVX) | Oil & Gas | 4.10% | 6.30% | 46.00% | AA- |
| Home Depot Inc (HD) | Specialty Retailers | 2.70% | 13.90% | 56.40% | A |
| Texas Instruments Inc. (TXN) | Semiconductors & Semiconductor Equipment | 3.10% | 12.80% | 71.40% | A+ |
| Abbott Laboratories (ABT) | Healthcare Equipment & Supplies | 2.00% | 12.10% | 46.90% | AA- |
| Intercontinental Exchange Inc (ICE) | Investment Banking & Investment Services | 1.40% | 11.40% | 29.80% | A- |
| Mastercard Inc (MA) | Software & IT Services | 0.60% | 16.20% | 19.30% | A+ |
| Caterpillar Inc (CAT) | Machinery, Equipment & Components | 1.40% | 8.70% | 24.00% | A |
| Realty Income Corp (O) | Residential & Commercial REIT | 6.00% | 3.60% | 74.40% | A- |
| Procter & Gamble Company (PG) | Personal & Household Products & Services | 2.60% | 5.60% | 58.30% | AA- |
Using the data below, we are dealing with a portfolio with an average yield of 2.5%, which is in line with my personal 2.5%-3.0% target range.
The average 5-year dividend CAGR is 9.4%. The average payout ratio is just 50%.
Leo Nelissen
In order to test this portfolio, I made two model portfolios.
- One of them is the equal-weight version of the stocks above. Each stock has roughly 6.7% exposure (100%/15).
- One model portfolio includes the S&P 500 with 40% exposure. All single stocks have 4% exposure for a combined 60%. I'm doing this as an experiment, as many people hold ETFs in addition to their single stocks.
Please note that I balanced the portfolio quite well. I am not overweight in any specific sector or industry. In fact, the portfolio does not hold direct "tech" exposure, which could have been a disadvantage.
However, it wasn't.
As we can see in the chart below, since 2007, the 15-stock model portfolio has returned 15.4% per year, turning a $10,000 investment into $119 thousand, including dividends!
The portfolio that included the 40% S&P 500 returned 13.3% per year, which isn't bad either. However, the only thing adding 40% S&P 500 exposure achieved is a less than 0.2 points decline in the standard deviation.
This shows just how powerful the diversification of the original 15-stock portfolio is.
Portfolio Visualizer
The S&P 500 returned 9.9% since 2007 with a standard deviation of 15.8%, which is higher than both model portfolios.
As a result, the 15-stock portfolio has - by far - the best Sharpe Ratio. This indicates a superior risk-adjusted return.
During the Great Financial Crisis, the S&P 500 fell 51%. The 15-stock model portfolio fell just 39%.
Even better, both model portfolios have outperformed the S&P 500 on a very consistent basis, as we can see below. Only 2023 was a true outlier year for the S&P 500 due to its massive tech exposure.
Portfolio Visualizer
On top of that, dividend growth has been spectacular.
If you had invested $10,000 in these 15 stocks in 2007, you would have received slightly more than $2,500 in annual dividends last year. That's a 25% yield on cost.
That number would have been 15% if you had invested 40% in the S&P 500.
Portfolio Visualizer
Moreover, while I cannot discuss each stock in this article, I frequently cover each of these stocks and believe that all of them still have what it takes to beat the market over time.
All things considered, I believe regardless of age, dividend growth investing is the single best way to put money to work. I also believe it's the least stressful way, as we can get better returns with less risk if we pick good dividend stocks.
Whenever I buy a company, I apply an "owner mindset," as if I were to buy the whole company (like Buffett).
This has allowed me to stay calm through various sell-offs.
In fact, I wouldn't even mind if we were to enter a recession - at least not from an investor point-of-view (I'm not a horrible person).
Even if my stocks go temporarily south, I know I own good companies and will be able to add capital at better prices.
Going forward, I hope to own many of the stocks from this 15-stock model portfolio in addition to the ones I already own.
Takeaway
Investing in dividend (growth) stocks offers a robust strategy for consistent returns and lower risks.
Through historical analysis and personal experience, I've found that companies with a track record of increasing dividends show strong financial and management discipline.
This not only provides steady income but also positions investors for long-term growth.
By diversifying across high-quality stocks with wide-moat business models and healthy balance sheets, like those in my model portfolio, investors can achieve market-beating returns with less volatility.
Regardless of age, adopting an owner mindset and focusing on dividend growth investing can lead to superior outcomes, even during economic downturns.
