Passive investing in index funds has long been heralded as a reliable strategy for generating returns that mirror the overall market. However, it’s worth exploring alternative investment approaches that have the potential to significantly boost wealth. One such method is to carefully select individual stocks that outperform the market average.
For instance, consider the case of The Procter & Gamble Company (NYSE:PG). Over the past five years, its share price has soared by an impressive 62%, surpassing the market average. While the 3.1% rise in the last year may not be groundbreaking, a deeper analysis of the underlying fundamentals reveals interesting insights.
Rather than relying solely on Warren Buffett’s famous quote about market discrepancies, let’s examine the relationship between Procter & Gamble’s share price and its earnings per share (EPS) over the past five years. Surprisingly, the company achieved compound EPS growth of 10% per year, which aligns closely with the 10% average annual increase in the share price. This suggests that market sentiment towards the company’s shares has remained relatively stable and reflects the consistent EPS growth.
Moreover, it’s important to consider the total shareholder return (TSR), which encompasses both share price returns and the value of dividends. In the case of Procter & Gamble, the TSR over the last 5 years was an impressive 84%, exceeding the share price return. This highlights the positive impact of the dividends paid by the company on the overall shareholder return.
While the market average return may have outperformed Procter & Gamble’s total return during the past year, the company has delivered an annual TSR of 13% over a five-year period. This indicates that the business has maintained a strong track record over the long term, even if the share price gains have slowed down. To gain a deeper understanding of its performance, it’s crucial to consider multiple sources of information.
In conclusion, while passive investing in index funds offers the benefit of market-mirroring returns, actively selecting the right stocks can significantly enhance wealth. Procter & Gamble’s success serves as a compelling example of how individual stock choices can outperform the market average. It’s advisable for investors to consider a diversified approach that combines both passive and active strategies to maximize their returns.
FAQ:
Q: What is passive investing in index funds?
A: Passive investing involves investing in index funds that aim to replicate the performance of a specific market index, such as the S&P 500. The strategy is centered around long-term holds and low portfolio turnover.
Q: What is total shareholder return (TSR)?
A: Total shareholder return refers to the total return earned by an investor through a combination of share price appreciation and dividends over a given period.
Q: What is compound earnings per share (EPS) growth?
A: Compound EPS growth is the average annual growth rate of a company’s earnings per share over a specific period, taking compounding into account.
Q: Why is it important to consider dividends in total shareholder return?
A: Dividends contribute to the overall returns experienced by shareholders. Including dividends in the total shareholder return calculation provides a more accurate representation of the investor’s earnings.
Q: How can investors maximize their returns?
A: Investors can maximize their returns by employing a combination of passive investing in index funds and selecting individual stocks that have the potential to outperform the market. This diversified approach helps achieve a balance between long-term stability and the opportunity for higher returns.