Investors are quick to put themselves in an investing strategy “bucket”. One will say they buy value stocks while others will say they buy companies with fantastic growth opportunities. Although these strategies have merit on their own, combining growth, value and dividend income will provide a portfolio strategy that will yield excellent long-term stock returns.
The Classic Comparison Between Growth and Value
The two strategies of stock picking are constantly compared with back-tested returns. Even in the current market conditions of writing this, I am constantly finding companies with fantastic growth on their income statement at a fair or undervalued price.
The key here is that great companies with impressive growth can be found at fair prices in every market condition.
Investing is where you find a few great companies and then sit on your ass.
- Charlie Munger
Legendary investor and vice-chair of Berkshire Hathaway
Often, great companies find themselves in the news for bad reasons with investors over-selling and thus creating fantastic buying opportunities. The question you must ask yourself is “does this event or bad publicity greatly affect the underlying business and future cash flows.
Don’t Underestimate Dividends
Dividend paying stocks are the class of equities that investors run to in a declining stock market and seem to forget about in a bull market.
- Braden Dennis
Dividend paying companies with healthy payout ratios are profitable businesses that have shown to outperform the broader market when back-tested over the history of the stock market. Lets look at the data.
Growth of $100 with S&P 500 Dividend Policies from 1972-2017*
*Source: Hartford Funds - The Power of Dividends
Dividend Growers - $8,267
Dividend Payers - $5,857
S&P Equal Weighted Index - $3,055
Dividend Non-Payers - $327
Dividend Cutters - $85
This back-tested data shows massive outperformance from dividend paying companies compared to the broader market and non-dividend payers. Dividend growers are companies that are referred to as Dividend Aristocrats and have a long track record of growth in their dividend distributions. This implies they have successfully been able to produce growth in earnings for shareholders and then increase their payouts for decades.
How to Combine All Three
It is so easy to screen for stocks containing all three characteristics. As seen in the dividend back-tested data, companies that grow their dividend have already met two of the three strategies. Now, all investors have to do is not pay extremely high valuation multiples for the business. Investors do not have to seek rock bottom valuation ratios, but simply avoid 50+, 100+ or more earnings or sales multiples.
To learn how to screen for these companies, check out this article.
To learn how to properly use the P/E ratio, check out this article.