Can You Beat the Market With Dividend Paying Stocks?

As most of my regular readers know, my investments are comprised of index funds.  I don’t own individuals stocks.

But I used to.

And many people think I’m crazy because, over an eleven year period, my individual stocks outperformed a diversified portfolio of indexes—before I sold them, and opted for an indexed strategy.  When I sold those stocks, I was emotionally gutted (because those stocks were my babies) but I think it was the right thing to do.  You can read my original post about it, here:  Why Am I Selling $700,000 Worth of Individual Stocks?

Most active investors don’t track their stock market performances, dollar for dollar, compared to a diversified portfolio of indexes.  Sure, some might have done it for a couple of years, but I have yet to see a financial blogger who claims to have beaten a portfolio of rebalanced, diversified indexes over a decade or more.  So it surprises me when I read about investors, online, who suggest that it can be done fairly easily…with the safety of dividend paying stocks.

I’m the opposite.  My stock picks beat the market handily over more than a decade.  And I tracked the dollar for dollar comparison, both with my personal account, and with the account of the investment club I run. 

But I don’t have illusions of grandeur, and here’s why:

True, I researched my stocks thoroughly, but there are plenty of times when I was simply….lucky.

Let me explain:

Last week, I found my handwritten notes on a business that I was interested in buying, in 2001.

It had paid uninterrupted dividends for more than 100 years: …read more 

It was diversified, run by extremely well respected people, and it had increased its earnings per share by more than 150% in the previous decade.

It had increased its dividend payout nearly every year…virtually forever–and by more than 14 percent annually over the previous decade.

It had net profit margins of 21 percent, annual net income that was three times greater than its long term debt, and a book value per share that had doubled in the previous ten years.

It had fewer outstanding shares than it had the previous decade

Profit margins had improved every year for more than fifteen years.

My challenge to you:

Try finding a business with better metrics than this one, and you will likely exhaust yourselves looking.  Don’t even mention the Canadian banks.  They don’t come close to the stable, growing profitability metrics of this blue chip business.  Not even close. 

And what about price?

When I looked at this business, it was selling at $37.15 per share.

And I calculated the following—in 2001:

If the business could grow its EPS (earnings per share) by 11 percent annually for the next decade (a lower than historical growth rate) that would give me a projected EPS of $4 per share, in 2011, from $1.41 per share in 2001.

If the stock sold at its decade average price to earnings ratio, then it would give me a projected, future stock price (in 2011) of $104.80 per share.

What were professional analysts saying in 2001?

Valueline analysts projected that the share price would grow by 13 percent to 19 percent annually over the next five years.  Respected analyst, Edward Plank, said this, in December, 2001: “Given their current price, their high safety and stability ranks make them a worthwhile long-term holding on a risk-adjusted basis.  That’s primarily because consistent earnings growth is practically assured…”

This is what I expected, compared to what actually occurred:

2001 Price

Projected 2011 Price

Actual 2011 price





The company was General Electric.

And as luck would have it, I didn’t buy shares.

It would be easy to say that I chose not to buy them, but for whatever reason, I didn’t have cash at the time, so I didn’t make the purchase.  My investment club didn’t have the cash either, so I couldn’t buy GE shares for them.

Would our respective track records be different today if we had made that purchase?  Absolutely.

I believe that there are people who will get lucky and beat the market over their lifetimes, with well-selected stocks.  But I don’t think I’ll be one of them.

I’ll admit, however, that I do get a kick out of less experienced investors who believe, so adamantly, that they can do it…just by purchasing great, historical, dividend paying stocks.

There’s partial condescension in my words, no doubt.  But another part of me admires that kind of assured confidence. 

What do you think?

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

You may also like...

20 Responses

  1. In 2001, it all looked like roses for GE. They looked better then than any dividend paying stock I could find–including the Canadian banks. But that all changed. And it could change for any bellweather stock. Or do you think there are businesses that are immune to what GE went through?

  2. DIY Investor says:

    Excellent example. I agree with the "luck" comment. I came close to buying Enron because I liked their business model – basically insuring both sides of the street and winning no matter what happened. I still believe they had a can't lose approach but were done in by pure greed. Also, I will admit that at one time it seemed to me that a big investment in GE would have made sense. Your observation that the list of stocks that consistently raise dividends is missing some names that would have been there a few years ago is worth thinking about.

    I am also following the blogosphere's intense interest in the sector (no pun intended). My take is that like any sector it will have its day, get bid up, and then have an extended period of underperformance. We happen to be in a period of historically low interest rates which gets people to take risks to gain income. These risks can be subtle. Today many view high dividend stocks as bonds. They aren't bonds. They are riskier than bonds. It will take a major market down turn for some people to see this.

    In 1999 the fervor was directed towards internet stocks. At the time it was impossible to convince people that valuation measures still counted.

    • I agree with you 100% Robert. The moment that the masses start thinking that they've found "the key" to investing (and currently, that's dividend paying bellweather stocks that increase their payouts over time) then a very small premium takes hold of the stocks, relative to what people were willing to pay in the past. As such, the historical outperformance people look back on for verification doesn't get repeated. True, stocks that increase their dividends over time have been good performers. But they weren't popular in the past–unlike today. Popularity, in investment circles, is a very bad thing—leading to underperformance, or at best, mediocrity.

      And if a couple of those "great dividend paying stocks" pull a "General Electric" on your portfolio, then performance is really going to suffer. No business looked safer than GE, in 2001. And look what happened.

  3. Echo says:

    Interesting example, I thought you'd be going for an Enron or Lehman Brothers there but GE took me by surprise. There was an interesting development for GE in 2001 that might explain their recent decline. Jack Welch left the company after arguably the greatest 20 year reign of any CEO.

    As an investor, would you put a bunch of money into Berkshire Hathaway in the year Warren Buffett retired (even after a rigorous succession process)? How about Apple after Steve Jobs leaves the company?

    Not to say they can't continue to be great companies, but you have to admit that losing a talented CEO must play some factor in the markets (fair or not).

    • You have a good point Echo, but Jack Welch doesn't look as talented today as he once did. First of all, his retirement compensation package was absolutely obsene. The guy is currently a significant financial drain to the company, getting greater compensation while retired than many blue chip CEOs get while working. And GE's earnings were a bit too "smooth". It has been said that he encouraged the company to hold back on earnings that were higher than analysts would expect, while bringing those earnings forward during weaker years. Either way, he isn't thought of as highly today, now that much of the dust has settled.

      As for buying BRK when Buffett is gone, he himself has suggested that this would be a good time to buy, as BRK will likely go on sale for a period of time. I would be far more comfortable doing that than buying Apple under the same circumstances. Apple has to continue doing too many cutting edge things right, year after year, to stay on top. BRK could pull a Wesco financial and do little, yet still reap rewards from the businesses it owns. Yeah, somebody could still mess up BRK, but the nice thing is this: you or I could run it, Wesco-style (probably!) and although it certainly wouldn't do as well, it would likely match the market, thanks to all the businesses within its ranks–which are all governed by independent managers.

  4. The Dividend Ninja says:


    Though all the posts you write are outstanding, this one is exceptional 😉 This is really the point isn't it. If you only have a basket of 10 to 20 dividend stocks it only takes one or two companies with a couple of dividend cuts, or even worse one that goes under. It's happened before and it will happen again. Each economic downturn has become more extreme than the previous one, especially with a derivative backed market.

    I think many dividend investors are likely to do very well picking excellent companies,and collecting the dividend income, dividend growth and of course growth of their shares over time. They generally aren't specualting on questionable stocks, and dividend yield is pretty good these days. Can they beat the market? I doubt it. Simply put dividend stocks don't outperform the market, becuase they are part of the market.


    • Thanks for the compliment Ninja,

      I also think that an investor with a basket of dividend paying stocks can do really well over time, as long as they don't consider it "easy" to beat the market with such a strategy.

      I have often wondered how many stocks a person should have, to avoid cratering their portfolio if one of the stocks takes a long term dive. And I don't think you'd need as many stocks as most people think you would. Considering the DOW, it has only 30 stocks in it. And generally, it isn't much more volatile than the S&P 500:…
      And if you draw the chart out over thirty years or more, the S&P 500 and the DOW chart lines are practically on top of each other. So I think as few as 30 dividend paying stocks could give you market-like returns. The biggest mistake people make, I think, is in trading their stocks: looking for greener pastures. They often do this when prospects for some of their stocks turn bleak. But then, when the clouds are darkest, often the biggest rainbows follow. The disciplined stock purchaser with low low portfolio turnover can easily match the market over a long period of time–but like you, I think their odds of beating the market are slim.

  5. Andrew, once again a great post.

    I'm curious, just how long does someone have to beat the market until you'll chalk it up to skill?

    @Echo: I'd argue that the best time to buy BRK is when Buffett retires. If he passes away suddenly, the stock would fall 30% in one day. I'd be sniffing around it, that's for sure.

    • Hey Uproar:

      I wish I knew the answer to your question: How many years would a person have to beat the market before I'd consider it skill, and not just luck?

      That's a tough question. Bill Miller, of Legg Mason Value Trust, beat the market for 15 years in a row (an outright record) but in the 16th, 17th and 18th years, the S&P 500 took back the advantage. Poof! His long term track record is now a loser, relative to the S&P 500. And he has been called the greatest stock picker of our generation:

      I really hoped this his record would remain untarnished, because I was beating the market as well, and contributing it to "skill" for many years, instead of "luck"

      I searched for books that validated "skill" over "luck" but when I read those books a few years later, they disappointed me. Authors that so readily claimed that you could find index beating investors came up short, when father time brought out his measuring stick.

      I still believe that there's an element of skill involved. But I also think that investors who beat the market over 20+ years are also extraordinarily lucky.

  6. Echo says:

    My point about GE is that it's very possible Jeff Immelt has not followed the same management style that made GE the most valuable company in the world at one time under Welch.

    Is he as adamant about developing people, differentiation, and Six Sigma? How about being number 1 or number 2 in the market or else fixing it, selling it, or closing it?

    So, yes of course there would be a dip in the stock price of BRK or Apple when their leaders step down. There likely was after Welch stepped down too, which many investors thought they would exploit to their advantage.

    But you don't just change the leadership and keep your ship moving in the exact same direction as before. CEO's have ego's and the desire to run the organization to their own vision, not live in someone elses shadow.

    I'm sorry to get off topic from the main point of your article, which was a good one. I just felt the GE example deserved some additional debate. A company with similar metrics and longevity is Proctor & Gamble, and they have continued to outperform the S&P 500 over a long period of time.

  7. Robber Baron says:

    Let's say all is true. but…

    there are two alternatives here.


    If one held 12-20 dividend-paying stocks, reinvesting dividends, and let's say, for the moment, that one only chose those paying more than the average of all all dividend-paying stocks (so, roughly 3%), and no single holding was greater than 10% of the basket (and no sector more than 20%?)…. compared to general index funds/ETFs that pay less than 1%… somebody do the math. How does it work if, say, one dividend-payer tanked (a la GE) but that, on an annual basis, the portfolio were re-balanced ONLY to replace those items that failed to maintain the dividend? Principles of compounding would be a significant consideration if we run it out 10 years.



    If one bought a dividend Index fund/ETF rather than a non-specific index fund.

    Thanks Andrew, for the education and though-provoking your provide.

  8. Some good points there Echo. P&G has outperformed the S&P 500 since 1990. From 1970 to 1990, it ran neck and neck with the market. Will it continue to match its recent market-beating performance? Maybe. But it's tough to say. Either way, it's a great business to own, and you're smart for owning it. But I suppose there's an important question to ask: Could P&G suffer the same fate as GE? I suppose that anything is possible, right? If it's one of dozens of stocks, as the Ninja has alluded to, you're probably going to be fine no matter what.

  9. Good post Andrew. For investors, I feel there are 3 steps that need to be planned.

    – Wealth Accumulation

    – Retaining Wealth

    – Living From Wealth

    Not all strategies are necessarily good in all the steps above and should be planned accordingly. As methods evolve, so do the products. Coincidently, Canadian Couch Potato had a hard time finding historical data on index funds for 10 years but there are tones of them now since it's gaining in popularity. In which case, the game of picking which index arises 🙂 Many indexes in Canada are actually heavy resources and financial so indexing is not a given either. It also takes some patience for index investing and the reward happens after a number of years as you may be starting your strategy during a bull market … Canadian Couch Potato also found that some people aren't patient with the strategy. How many years does it take for indexing to really shine ?

    Retaining Wealth and Living From Wealth can be challenging if you tie your investments to the market as you may need your money when the market crashes and that's not a solution you want to be in.

    I have a blend of strategy although I write only about Dividend Investing 🙂 … And I know you are curiously watching my track record 🙂

    • Financial Planner Dude says:

      If you look at the long term track record of CCP you’ll notice not matter what portfolio (low rish or high risk) at the 20 year mark they all return the same amount, around 6%

      Secondly David Stanely has a 25 year track record of buying and holding individual stocks and has absolutely trounced the index, by some 30% and only 1 bankruptcy (laidlaw I think). The problem is that it’s hard for the average investor to do as few can come up with the capital to buy the stocks each year (typically 1-2) that show up. As well re-balancing is a pain.

      To me the main advantage of dividend investing is the compounding dividends. Each month/quarter my income increases bit by bit. Most of my holdings are quality dividend growth stocks. For every Transalta I had I have several Emera and Fortis which make up for it

  10. Hey Passive,

    I think your blended strategy is a good one because you're well-diversified. You're also right about the Canadian index being focussed (perhaps too focused) on resources….and banks.

    Having said that, the long term data that Ian McGugan initiated on Canadian Couch Potato Investing goes back to 1976, and it's pretty impressive. With money evenly split between the Canadian index, U.S. S&P 500 index and the Canadian bond index, the historical records show that people didn't have to be especially patient to reap nice rewards. What do you think of this historical record? It's pretty darn impressive and not that volatile, even considering the Canadian indexes bias towards resources and banks:

    Your blended strategy, however, is also excellent. And I actually love watching your income grow every quarter….so keep posting it. It serves as a great education for many people who wonder how to properly measure investment success.

  11. Hey Andrew,

    Thanks for the link. I was referring to this one where he found it hard to find 10 year history but it was for ETF in retro-spec. ( I believe he found data from Morningstar now. Sorry for the confusion … However, it's yet another recent set of products to further complicate the choices for investors.

    Out of curiosity, what took you so long to switch to Index investing considering your conclusion 🙂 You must have been leaning that way for quite a while.

    I'd like to add that I like dividends for the income and growth predictability (please, don't confuse it with certainty) even if it is less than an index performance after the fact … Does that make it wrong?

    • Hey Passive,

      I think you have a great, balanced approach. I probably would have taken that route myself, but I figured that I'd keep stretching into more and more stocks, with less and less money into indexes. In a way, I had to go cold turkey! Nearly half of my portfolio was comprised of individual stocks, and my stock component was taking all of my fresh money. It got to a point where I didn't want to add to my indexes.

      Also, I wanted to make the maximum amount of long term money, with the lowest possible effort. And in Singapore, I don't pay capital gains taxes at all, but I do pay 30 percent tax on dividends, so high dividend payers were going to be a slight albatross for me.

      I sure tossed and turned over the years though, trying to figure out whether I should just index the whole lot. When I met Warren Buffett, in 2005, I really wanted to ask him what he thought I should do (fully index or not) but instead, I found myself talking to him about an individual stock (Simpson Manufacturing).

      When I did eventually sell all of my stocks, I was so upset for days. And my wife was angry with me. But eventually, it became such a liberating feeling. I used to read so many annual reports, and every month, when I got fresh money, it was so tough for me to decide what to buy. Now it's so easy, and I'm really glad that I took this route. I just look at my index that performed the worst over the previous month, and I buy that.

      If I had the discipline to keep a portion of my portfolio in stocks (and only a portion) then I probably would have done that. But I knew that buying stocks was a lot more fun, and sooner or later, my stock component would grow again, to the point where it exceeded my indexed allocation.

      The problem with indexing is the plethora of alternatives investors have today. They aren't really there to create options for investors; they're available to excite the investor, I think–to make him/her see that a different index (ETF) would suit them better. All this does, I think, is encourages people to trade…and this makes money for the industry.

      But back to your strategy. I do absolutely love it.

      My caveat was meant for those who think they can create a 100% stock portfolio and beat the market with it, just because they bought dividend growing stocks. Those people, I think, are deluding themselves a bit.

  12. Excellent post Andrew.

    But here's the thing IMO: your 11-year track record, while lucky was also blessed with skill. More often that not, you have to be good to be lucky.

    No doubt you experienced returns beyond your expectations; maybe your market/buy timing was very lucky, but you also had some savvy know-how and some finely-tuned experience on your side as critical tools to help you achieve financial success. Kudos to you for kicking butt for so long 🙂

    Am I thinking I can do the same with my Canadian pipelines, banks, telcos and other blue-chips? Nope, not for a second. What I'm looking for is not to "beat the market", rather, be an investor in it and reap many of the rewards (read in: dividends) that come with being a long-term owner in successful, established businesses that will carry me in good times and in bad. Great companies are the best defence against inflation in my opinion. On the flipside, great companies also provide investors with a great offence as well 😉

    I personally don't thnk a small basket of dividend-paying stocks will beat the market in the long-run, but I know from experience and literature that these stocks won't sink you either. I think the magic number of stock holdings is about 25-30. Sure, you can own more, but you're almost indexing at that point. To this end, I agree with what you said about the Dow – "it isn’t much more volatile than the S&P 500" and many studies over many periods have proven it. I also like what you said about trading, but then again, trading has never been investing has it? 🙂

    Again, great post Andrew and equally great comments from blogosphere.



    • Thanks Mark,

      I think you're absolutely right–especially about the great comments. I'm really pleased by the quality of comments on this blog. You guys all know your stuff, and for others who are reading your ideas, you're doing them a great service.

  13. Barry says:

    Hi Andrew

    Re: Most active investors don’t track their stock market performances, dollar for dollar, compared to a diversified portfolio of indexes

    I've just finished reading Buffetts letter to shareholders, he also tracks and compares Berkshire to the S&P500 with dividends (i.e an accumulation index) and I was wondering with the above and your index strategy

    Have you tracked your current index investing strategy and how has it performed?



Leave a Reply to Echo Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.