Quick, what’s 0.19% of $3.6 trillion? I’ll give you a hint: that’s how much, on average, passively “managed” mutual fund giant Vanguard Group collects in management fees annually. Since Vanguard is not a publicly traded entity, the actual revenue numbers are held pretty close to the vest.
But the math comes out to be $6.8 billion in fees based on the average Vanguard fund expense ratio of 0.19%.
So, while the fund company prides itself on being shareholder owned, and pounds the table on passing value to the investor, make no mistake, Vanguard is a business and a profitable one at that. And while
Vanguard founder John Bogle is nowhere close to being a Wall Street fat cat, his tenure at the company made him an incredibly wealthy man by most standards.
The other day while driving in to work, I listened to an interview with Mr. Bogle on Bloomberg radio, as always, trumpeting his case for cheap, passive index investing. He complained, like most of us, of the low-rate, low-growth environment. He said that the stock market is overvalued with a forward P/E of 20-plus (most estimates put it closer to 18), dividend yields barely around 2%, and U.S. economic growth under 2%.
According to him, the best solution for investors is to — drum roll please — put their money in a low-cost index fund. Shocker.
Now, I do agree with Mr. Bogle that yields are terribly low, and there’s no argument that U.S. economic growth is anemic at best. Is the market overvalued? Like always, some parts are and some aren’t. But that doesn’t mean investors should just accept a broad-brush vision and settle as Mr. Bogle would have them.
Above-market earnings growth and S&P-beating dividend yields are out there. They’re not even that hard find.
Here are three well known stocks that qualify.
Cisco Systems, Inc. (CSCO)
As the “Internet of Things” quietly grows, the world’s pre-eminent computer-networking hardware company surfs the same wave. Looking in the rearview mirror, CSCO has grown earnings per share (EPS) at a consistent average annual rate of 7.1% while boosting their cash dividend an average of 35% per year. Going forward, EPS is expected to grow an average of 10% annually over the next two fiscal years. CSCO shares are currently priced at around $31 with a forward P/E of 12.7 and a 3.37% dividend yield.
International Paper Co (IP)
Having pivoted from free sheet paper to higher margin packaging products, IP remains a key player in the rise of the emerging middle-class long game. Despite the lack of visibility for global economic growth, IP has delivered solid 5-year EPS growth of 29% annually. Dividend growth has been equally impressive with a 13.2% average annual growth rate for the same time period. The two-year forecast is equally optimistic, with anticipated average annual earnings growth of 34%. IP shares trade around $44 with a forward PE of 13.3 and a dividend yield of 4.16%.
AbbVie, Inc (ABBV)
Formerly the traditional research-driven, pharmaceutical side of Abbot Laboratories (ABT), AbbVie has posted solid results since the split. 5-year average annual earnings growth has clocked in at 28.16% with the dividend growing at a 40% annual clip for the same stretch. Looking forward two years, projections call for average annual EPS growth of 33.5%. ABBV trades close to $62 with a 12.28 forward P/E and a 4.18% dividend yield.
Risks To Consider: Despite my optimism and the compelling numbers these three companies have delivered, all three face significant economic headwinds. ABBV is experiencing difficulties with the obvious regulatory stagnation caused by Obamacare, IP needs real economic and consumer growth, and Cisco has a heavy reliance on capital spending which is often hard to find. However, all three companies do have solid franchises, world class cash flow, and consistent operating results in the current climate.
Action To Take: Combined, all three stocks have 5-year average annual EPS growth of over 21%, 2-year forward earnings growth of 25.8%, and a combined average dividend yield of about 4%. This combination of metrics could result in capital appreciation north of 17%, resulting in a total return in excess of 20%. Sure, throwing it all in an index fund is cheaper and easier. But higher returns are always worth the work.
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