Hulbert: Dividend stocks likely to beat bonds
The 10-year Treasury yields 4.9%, but Mark Hulbert argues that growing dividends will allow specific S&P 500 stocks to outperform over the next decade.
By John Ferrari ·
Mark Hulbert of Hulbert Ratings identifies 12 specific S&P 500 stocks that he believes will outperform the 10-year U.S. Treasury bond over the next 10 years. His analysis focuses on a group of companies known as Dividend Aristocrats, which are S&P 500 constituents that have raised their dividends for at least 25 consecutive years.
The current yield on the 10-year Treasury is 4.9%, more than double the 2.4% yield offered by the Dividend Aristocrats as a group. At first glance, the fixed income security appears to be the superior investment. Hulbert argues, however, that the fixed nature of the bond yield is a disadvantage compared to the growing dividend payments from the selected equities.
Hulbert’s model suggests that if these companies continue to raise dividends at their average growth rate since 2000, the investment will beat the 10-year bond. In this scenario, the stock prices of these companies would need to grow at an annualized rate of only 1.5% to achieve a higher return than the Treasury. Hulbert notes that the 10-year price-only growth rate for these stocks has rarely been lower than that threshold in the past.
The strategy relies on the compounding effect of dividend increases. In a 2022 annual report, Warren Buffett described a similar approach as a "secret sauce" for his firm, Berkshire Hathaway. Buffett cited his investment in Coca-Cola, which he purchased over seven years ending in 1994 for a total cost of $1.3 billion. By the end of 2022, that position was valued at $25 billion, driven by dividend growth from $75 million annually to $704 million.
Hulbert cautions that this is a long-term strategy. There is no guarantee that Dividend Aristocrats will outperform the broader S&P 500 index over shorter time frames. In fact, the Dividend Aristocrats underperformed the S&P 500 over the previous decade. The math favors the dividend growers only when the investment horizon extends to 10 years or more.
Investors seeking exposure to this group have several options. The ProShares S&P 500 Dividend Aristocrats ETF tracks the full list with an expense ratio of 0.35%. The Vanguard Dividend Appreciation ETF, which focuses on stocks with 10 years of dividend growth, charges a 0.04% fee. Hulbert also lists 12 individual stocks that are recommended by at least two of the newsletters tracked by his performance-auditing firm.
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