As I'm sure many of you know, I've been giving a lot of thought into the stock market during these past few months. One of my biggest questions has been the efficacy, in the long term, of buying stocks that increase in value versus stocks that pay out a regular dividend.
As far as I can see at the moment, both methods have clear advantages and disadvantages.
The obvious advantage of owning stock that pays out a high dividend is that you can more or less count on the money to end up in your pocket no matter how much the value of the stock goes up and down. If I want to get $50,000 a year from a stock that pays out a $1 dividend quarterly, the math is simple; I need to own 12,500 stock in that company. It doesn't matter what the price of the stock is; it can plummet by 50% overnight and - as long as the company doesn't change their dividend plan - my payments will remain the same.
One of my favorite dividend stocks at the moment is Chevron (NYSE:CVX), which during 2013 paid a dividend of $0.9 for the first quarter and $1 the remaining three quarters. During 2014, they've increased their dividend to $1.07, and we're looking at it probably reaching $1.10 within the next half year or so. The stock itself is a steady, gradual grower, moving from just over $102 per stock in the beginning of 2012 to around $125 now. It's no massive growth, about 18% in almost three years, but what it lacks in growth it more than pays back via dividends.
For example; if I were to buy 1,000 stock of Chevron right now, it would set me back about $102,000, but every quarter, I'd get $1,070 of that back. It'd take me 25 years to earn the purchase price back in dividends, assuming it doesn't grow at all. More likely, it's closer to 10 to 15 years. During that time, the stock itself has probably grown in value as well, and my $102,000 investment could be worth over $200,000.
The disadvantage of dividends, of course, is that it's very difficult to keep track of what you own. As these stock tend to grow slower than other stock, it's almost impossible to just sell your holdings for a quick pay-day, you need to sit it out and just let the money accumulate. For many, this is ideal; the idea of selling stock is anathema to many people. For others, who enjoy speculation and regular trading, this is a disadvantage.
The advantage of stock that grows over time is obvious. If you buy 500 stock at $200 each (for a total of $100,000) and it grows to a value of $270 a little later, you can sell off a couple of your stock to get some of your money back. This means you always have more or less ready access to capital that you can be fairly certain will increase over time. If you're saving up for a distant future event, say retirement, buying a house or car, or even just having a buffer in case you lose your job, this is a great thing.
There are several great "growers" out there. Apple (NASDAQ:AAPL) is one of the more obvious, having grown 3510% in 10 years (and 25,76% this year alone!). They currently show no sign of stopping, and I believe every dollar invested in Apple is a dollar well placed.
The disadvantage, of course, is that you can never be sure that the stock will continue growing year on year, and sudden changes in fortune can stall your growth or even take away from it. People lost millions of dollars in the stock market crash of late 2008 and early 2009, often seeing their total holdings drop up to 60% depending on which markets they were most heavily invested in. Microsoft (NASDAQ:MSFT), which had opened in 2008 at $36.12, was down at $15.28 at their worst in 2009, and it took them until November 2013 before they'd recouped their losses and traded above $36.12 again.
Even though the stock market crash was a massive anomaly, small mini-recessions or stagnation happens all the time, sometimes in a single market (say housing or medicine) or sometimes as a general trend in all markets. Relying on stock growth can be very risky, but if you spread your wealth into many markets you're safer than most.
The best of both worlds
There are a couple of stock out there that have both great dividends and great growth. These two things buffer against each other, so that even when growth is small, dividends still give you regular cash. Also, even if the dividends might be small, the growth of the stock makes up for it. I believe it's essential for your portfolio to include a couple of these.
My favorite best-of-both-worlds stock at the moment is Disney (NYSE:DIS). Even though they only pay dividends yearly, the value of their dividends has grown very rapidly. Just these past five years, the change has been:
- 2009: $0.35
- 2010: $0.40
- 2011: $0.60
- 2012: $0.75
- 2013: $0.86
They still haven't announced their dividends for 2014, but I'm expecting them to land around $0.90 to $0.95, possibly even above $1.
As well as having good dividends, their stock price growth has been a very nice upward curve since their drop in early 2009. They opened 2012 at $39.91, 2013 at $52.19 (more than 30% growth), 2014 at $76.11 (more than 40% growth). They're currently hovering around $90, which is 20% higher than they opened in January. Stock bought for $100,000 at their very lowest in September 2011 would be worth $267,730 now and would have paid out $6,714 in dividends. Adding up the growth and the dividends, that's about 275% growth in three years.
Another favorite in the same category is PepsiCo (NYSE:PEP) which has steadily grown their quarterly dividends from $0.45 five years ago to $0.66 today. During the same time, their stock value has grown by about 55%, most of that coming from gains in 2013 and 2014. $100,000 invested five years ago would be worth $171,752 today ($17,503 of which would be dividends, the rest in stock growth).