Because young investors have so much time ahead of them, they’re able to ride out the occasional face-melting downturn. That’s why you’ll often hear that newbies can take more risks with stocks, especially shares of small companies, which like them are unpredictable but filled with potential.
Yet millennials would be better off going with companies that their grandparents likely favor: stodgy but dependable Steady Eddies that will slip you a few bucks every now and then in the form of a dividend.
The Dividend Difference
True, shares of small budding companies have beaten big blue-chip stocks by two percentage points a year since 1926, according to Ibbotson Associates. This 89-year pattern has held true more recently as well. The S&P 600 small-cap index has gained an annualized 9.9% over the past 20 years, vs. 8.1% for the S&P 500 index of large stocks.
However, big stocks that pay and consistently raise dividends have actually beaten small shares over the past 10, 15, and 20 years. Take the S&P Dividend Aristocrats index, which consists of firms that have boosted payouts every year for at least 25 years. It has gained 11% annually over the past two decades. This group includes names that fit right in your grandmother’s portfolio, such as Coca-Cola and Procter & Gamble .
One thing Grandma may not have told you: Dividends have accounted for more than 40% of the S&P 500’s total return since 1926. The younger you are, the sooner you can take advantage of that by reinvesting the cash in the market and compounding your gains.
Graying Your Portfolio
If you want to go old school, try an equity-income fund like American Century Equity Income , which has averaged 9.6% a year for the past 20 years and charges a slightly below-average 0.93% of assets a year. For a much cheaper index fund option, there’s ProShares S&P 500 Dividend Aristocrats ETF , which yields 2.34% and charges just 0.35%.
These days you don’t have to limit yourself to the U.S. Through PowerShares International Dividend Achievers ETF , you can gain exposure to global dividend growers such as the pharmaceutical giant GlaxoSmithKline and the spirits maker Diageo .
It may be more exciting to invest in an emerging company like Shake Shack or GoPro . But there’s something to be said for buying proven winners and holding on. Says Rhode Island financial planner Malcolm Makin: “When I look back over my life, I wish I had bought Procter & Gamble or any number of solid, stable companies.”
Columnist John Waggoner is the author of three books on Wall Street and investing.