2 Growth Stocks Are Graduating While a Rare Milestone Signals Big Gains Ahead
By Lucas Downey, Contributing Editor, TradeSmith Daily
Remember when you graduated from high school?
Looking back now, it seems like a small step. But at the time, there was nothing like trotting across the stage and accepting your diploma.
Those moments are forever etched in our personal history, setting the tone for and springboarding us into the rest of our lives.
The stock market has its own set of milestones, too.
On special occasions, elite companies graduate from their ultra-growth profiles to a later stage in their growth cycle… Becoming dividend growth machines.
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When a company decides to pay a dividend, that's a huge vote of confidence in its own future.
Think about it. The firm is saying to investors, "I am so confident in the forward outlook, let me reward you by offering a share in the profits."
It's as simple as that. Dividends are the ultimate graduation signal that a business is stable enough to divvy up some of its cash.
As Warren Buffett has taught, dividends are a great way to build wealth. Not only that, but history proves it.
According to a Ned Davis Research report, since 1973 dividend growers and initiators have trounced non-dividend payers by a mile with more than double annual returns:
This graphic alone should get you excited.
But I still think we can dive even further into why elite companies that graduate into income plays have been outstanding stock performers.
Here's a cool study I performed…
I compiled a list of 15 notable dividend-growth companies spanning across industries. I wanted to see how their stock performed after the initiations.
Now, going back decades to find when a company actually started paying a quarterly dividend took some "best efforts" to try and compile.
I chose these 15 notable companies because I believe it was reasonable at the time to assume these well-known names would still be in business many years later.
When you see the stock tickers listed, you'll likely agree that these were bellwether names back in the day.
That's exactly how I feel about Meta Platforms and Booking Holdings. I'm confident these firms will be around many years from now given how profitable and strong their businesses have been over the years.
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Spanning decades, we have Walmart (WMT) from the 1970s, Home Depot (HD) from the 1980s, United HealthGroup (UNH) from the 1990s, and Costco (COST) from the 2000s.
Stocks like these that graduate to income plays have had some serious portfolio power:
Three months after these companies initiated a dividend, they gain an average of 11%…
A year later, they jump 51%…
And three years after, the basket of names is up a staggering 142.9%.
(Disclosure: I own MSFT, HD, WMT, SBUX, COST, and NKE.)
Now, I fully recognize there can be some bias to this list of stocks. These are some of the best dividend-growth stories ever.
But, the critical piece is that history shines on the graduation events. And if you're lucky enough to pick a company with the ability to raise its payout year after year, chances are your portfolio's earning power will blow you away.
Don't look away when all-star companies decide to pay their first dividend…
Instead, throw a graduation party!
Zeroing in on the best companies is a critical piece of the investing puzzle. Using data like this is how we find those companies here at TradeSmith.
Stay tuned for more studies just like these in TradeSmith Daily, helping you consistently pick out the cream of the crop.
Regards,
Lucas Downey Contributing Editor, TradeSmith Daily
P.S. The investing puzzle gets a lot simpler once you find your niche and stick there. It goes from a 1,000-piece jigsaw puzzle to something as simple as adding 2 and 2.
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If you're the kind of investor who just wants to buy great stocks and ride them higher, you need to see what Jason is doing. Click right here and check it out.
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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