Beat the Market? There’s Only One Way to Do It

By Tuesday, November 27, 2012

Beat the MarketIf you look at the stock market over the last dozen years or so, you really would not have done that well owning any of the major indices. The S&P 500 is trading at the same level it was back in 1999, so the notion of buy and hold in the stock market didn’t prove itself during this time period.

There are two keys to success in the stock market: timing and dividends. During the 1980s and ’90s, owning the S&P 500 was a hugely profitable endeavor; during the 2000s, it was not. If you break it down and look at individual stocks, timing (buying goods assets when prices are down) and dividends are the essential factors in wealth creation.

Consider a company like PepsiCo, Inc. (NYSE/PEP). If you pull up a very long-term chart on the company, you’ll notice that it has gone up a lot in value over time. But by time, I mean a long period of time. And for much of its history on the stock market, PepsiCo’s share did nothing. The only return you would have got was your dividend payments. The company’s recent stock chart is below:

Pepsico Inc Chart

Chart courtesy of www.StockCharts.com

According to the stock’s history, buying shares in PepsiCo during its major price retreats has proven to be a good investment strategy. If you took the company’s dividend payments and reinvested these funds into additional shares of the company, your returns over time would have been significantly higher.

The stock market crashed because of the subprime financial crisis, with the S&P 500 hitting a low in March of 2009. Say, for example, you saw the stock market recovering and bought shares in PepsiCo in August 2009. Your simple return from then to now would be approximately 23%. But if you took all the dividends the company has paid from then until now and reinvested these funds into additional shares of the company, your real investment return jumps to approximately 36%. (Thanks to Morningstar.com for the numbers.) That’s a big difference, and it illustrates the importance of dividends to stock market returns.

Reinvesting dividends can turn a lackluster stock market into real wealth over time. (See “What Many Blue Chips Are Signaling.”) Right now, I would not be a buyer in this market. Expectations for revenues and earnings are flat. But if the current consolidation turns into a full-blown stock market correction, select blue chip names that pay solid dividends would be worth adding. It’s going to be low and slow for the next several years, so dividends will be the equity investor’s only friend.


About the Author | Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »

Sep. 5, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter) $1014.15
Trailing 12-month Price/earnings multiple (Most Recent Quarter)

17.44

Dow Jones Industrial Average Dividend Yield 2.62%
10-year U.S. Treasury Yield 2.19%

Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.

Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.

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