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.
One specific example I recently Highlighted For Making This Switch Is Meta Platforms (META). The company just initiated its first dividend payment. And the trend is spreading.
Another all-star growth name is following suit: online travel giant Booking Holdings (BKNG). (Disclosure: I’ve owned BKNG for years.)
Just last week, Booking Holdings released earnings and initiated its first quarterly dividend of $8.75.
On the surface, these dividend milestones could make you think the high-growth days are behind us… and the face-melting price action along with them.
That’s flawed thinking.
In reality, dividend initiations on high-caliber companies are one of the strongest forward-performance signals out there.
Once you study the evidence, you’ll understand why this “graduation” milestone kicks off a journey that often leads to big profits.
Today, we’ll study many major companies that initiated a dividend and see what happened later.
Let’s just say, the forward gains may have you throwing your cap in the air…
Why Dividend Initiations Are So Powerful
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.
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.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
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Source: TradeSmith