Prediction: 5 Dividend Stocks That Could Crush the S&P 500 Over the Next 10 Years

A recent Wall Street Journal column suggests that investing in the second-highest quintile of S&P 500 dividend-paying stocks historically outperforms both the broader S&P 500 and the top quintile of dividend stocks; $1,000 invested in this second quintile in 1930 would have grown to $31 million by 2024, compared to $8.56 million for the S&P 500 and $19.37 million for the top dividend quintile. This strategy may avoid companies with unsustainably high dividends signaling underlying business problems, with examples of stocks in this group including ConocoPhillips, Hershey, Starbucks, Dollar General, and Citigroup.

Analysis

The article highlights a strategy, purportedly from The Wall Street Journal, suggesting that investing in the second quintile of S&P 500 dividend-paying stocks has historically generated superior returns compared to both the broader S&P 500 and the top quintile of dividend payers. Specifically, a $1,000 investment in this second quintile in 1930 would have hypothetically grown to $31 million by 2024, substantially outpacing the $8.56 million from an S&P 500 investment and the $19.37 million from the top dividend quintile. The underlying theory is that this approach may filter out companies with excessively high dividend yields that could signal fundamental business issues or unsustainable payouts. Stocks in this second quintile, numbering 72 according to a finviz.com screen, span various industries and reportedly offer dividend yields between 2.5% and 3.7%. The article provides ConocoPhillips (COP), Hershey (HSY), Starbucks (SBUX), Dollar General (DG), and Citigroup (C) as examples within this category, noting their dividend yields range from 2.6% to 3.4%, an average dividend payout ratio of 55%, and generally attractive valuations with most trading below the average S&P 500 price-to-earnings multiple. A practical challenge identified is the absence of a dedicated ETF tracking this specific segment, implying a need for individual stock selection or manual portfolio construction. The overall sentiment towards this investment thesis is positive (sentiment score: 0.3) with a moderate anticipated market impact (score: 0.4).

Key Decisions for Investors

• Investors could explore the strategy of targeting the second quintile of S&P 500 dividend-paying stocks, given the historical data suggesting potential for outperformance relative to broader market indices and top-tier dividend payers.
• Due diligence should focus on identifying companies within this second quintile that exhibit sustainable dividend yields (e.g., 2.5% to 3.7% as cited), healthy payout ratios, and reasonable valuations, similar to the characteristics described for the example stocks like ConocoPhillips and Hershey.
• Given that no single ETF currently tracks this specific group of 72 stocks, investors interested in this approach must be prepared for active portfolio management through individual stock selection or by curating a diversified basket of qualifying names.