[July 2013: This post has been updated. You should really read the current version.]
Size isn’t what matters (mostly). When most consider stock market performance, they focus on the size of the portfolio. The size of the investment. It’s really not the only thing that matters.
In my opinion, it’s not even the thing that matters most for the modest individual investor.
Dividend performance and the resulting income you receive from your portfolio is a critical perspective to take as a long-term investor. Let me share an example.
The Wall Street Journal wrote an article yesterday comparing the stock market performance returns of Microsoft and Apple for the past 10 years. Had you invested $10,000 in each 10 years ago, you’d have about $13,000 in Microsoft today but $700,000 in Apple.
I saw the article late at night and tried to figure out which 10 year span they used to show the gain in Microsoft! I looked at Yahoo! Finance for a few dates in the last month, and compared to 10 years ago Microsoft’s stock price was quite close to even or slightly down.
But, the thought in my head wouldn’t go away.
That thought was to compare dividend performance of Apple and Microsoft over that same time period.
Since author Brett Arends didn’t tell us what dates he used, I’m going to do a quick “back-of-the-napkin” analysis that should be quite valid.
$13,000 of Microsoft stock at yesterday’s close of $26.95 would imply that we own about 482 shares. Let’s say 500 shares – notice I’m rounding UP.
$700,000 of Apple stock at yesterday’s close of $589.36 would imply that we own about 1,187 shares. Let’s say 1,150 – notice I’m rounding DOWN.
While at the time of the original purchase 10 years ago, neither company had a dividend, both pay dividends today. Microsoft paid some dividends in 2003 & 2004, and started regular payments in 2004. They also paid a $3.00 special dividend in 2004. Apple started a dividend this past August.
Had you made the purchases Brett describes you’d receive the following annual paychecks from your portfolio:
Microsoft’s dividend is $0.92 per year (per share). 500 shares of Microsoft would give you a paycheck from Microsoft of $443.44 per year.
Apple’s dividend is $10.60 per year (per share). 1,150 Apple shares would give you a paycheck from Apple of over $12,500! That’s right, you’d get 25% more than your original investment back EACH YEAR.
Let me say this differently. As of today, Microsoft is returning 4.4% as a dividend this year based on the original $10,000 investment. Apple is returning %125 on that same original investment (this year).
Heres’ a short quiz, just to make sure you’re following along:
Which is a better return 4.4% or 125%1?
Next, let’s consider dividend increases. Apple has no history of doing so since this is their first year having a dividend (in a long time). Microsoft increased their dividend 15% in 2012 (compared to 2011). If they increase another 15% next year, our Microsoft shareholder would earn an addition $66.51 next year, pumping next year’s return to 5.1% on the initial investment.
As Apple shareholders, let’s hope/pray they increase their dividend just 5% compared to Microsoft’s 15% raise. That 5% increase gives our Apple shareholder an extra $625 in income next year (an increase more than the total Microsoft return). That’s a 131+% return on the original investment next year alone2.
And, this whole “back-of-the-napkin” analysis doesn’t even account for the stock market performance impact on the overall portfolio. I mean, you’d have roughly $700,000 more Apple than you would Microsoft (see that, I made the whole value of the Microsoft purchase a rounding error compared to Apple’s value!)
I was going to actually build a table of all the Microsoft dividend payments since 2003 to compare the extra 9 years of dividend payments compared to Apple, but now realize I don’t even have to to prove my point. Even if we assume our Microsoft investor received $450/year3 from 2003-2011 they’d still have less than $5,550 in dividends total for the prior 9 years combined4. Notice that even according to Brett’s results, Microsoft’s stock market performance results were heavily disproportioned towards their dividend return, and not portfolio growth.
Make sense? I hope so, this is really important to you (if you care about your financial future, the financial safety of your family, or being responsible). Especially as a modest investor.
Of course, we have to consider the opposite position. One could argue that Apple is worse for investors because the fiscal cliff will cause Apple shareholders to have a way larger dividend tax increase than it will Microsoft shareholders5.
If you found this interesting, you really should check out my free 10-part email course on investing your 401K Rollover.
(disclosure: long Apple)
- 125% [↩]
- I’ll leave the math of the fantasy of a 15% raise to you guys [↩]
- The dividends started smaller and have grown over time, so they got much less in the earlier years with the exception of the $3/share special dividend in 2004. [↩]
- $450/year for 9 years, plus about $1,500 in special dividend in 2004. [↩]
- This is a joke. [↩]