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Behold the Anti-Yield-Hog Portfolio

The Globe and Mail recently ended its Strategy Lab experiment after five years — an experiment that saw four investment industry-related individuals invest $50,000 in hypothetical investment portfolios. Trading as much or as little as they wanted, the participants produced satisfactory to excellent returns.

One of the participants was the Globe’s very own business writer, John Heinzl. Dedicated to investing in companies that consistently grow their dividends, Heinzl’s portfolio delivered an annual total return of 11.6%. Of that gain, likely 35% was due to dividends with the rest from capital appreciation.

Any way you slice it, Heinzl’s portfolio is a winner. Over this five-year period, his portfolio beat the TSX Composite Index by almost 400 basis points annually. We can all learn a thing or two from his strategy.

However, as much as I agree that his portfolio is a winner, it’s time for me to play devil’s advocate.

Total return is what counts

I’ve gone and found the 10 best-performing TSX stocks over the past five years. I considered only those stocks that have a current market cap of $1 billion or more and a share price of $10 or more. Three of them don’t pay a dividend, another four barely do (less than 1% yield), and three yield more than 2% annually.

The shareholders of these 10 companies got most of their annual return from capital appreciation rather than dividends.

The 10 best-performing stocks of the past five years

Company

Annual Return

Dividend

Yield

Company

Annual Return

Dividend

Yield

Canopy Growth Corp.

(TSX:WEED)

84.6%

N/A

Air Canada

(TSX:AC)(TSX:AC.B)

83.2%

N/A

CCL Industries Inc.

(TSX:CCL.B)

53.4%

0.7%

New Flyer Industries Inc.

(TSX:NFI)

48.1%

2.5%

Constellation Software Inc.

(TSX:CSU)

46.7%

0.7%

The Stars Group Inc.

(TSX:TSGI)(NASDAQ:TSG)

45.2%

N/A

Boyd Group Income Fund

(TSX:BYD.UN)

43.0%

0.6%

Premium Brands Holdings Corp.

(TSX:PBH)

42.8%

1.7%

Magellan Aerospace Corp.

(TSX:MAL)

38.4%

1.4%

Dollarama Inc.

(TSX:DOL)

34.5%

0.3%

Source: Morningstar.ca

Earnings drive share prices higher

The 10 stocks above got 98.5% of their annual performance from capital appreciation and just 1.5% from dividends.

What dividend enthusiasts forget is that earnings drive share prices higher a majority of the time — Canopy is a bit of an outlier — with dividend growth a nice bonus of a job well done. Thus, dividends only grow over the long haul if earnings grow.

You’ll notice that Canopy’s stock was the top performer with absolutely no earnings over the past five years. With cannabis a big deal in Canada at the moment, I suppose it would be possible for Canopy to borrow the money to pay dividends, but why would it?

Bruce Linton and the rest of the people who run the company are looking to hit a significant home run in this burgeoning industry; scaling the business is far more critical than rewarding shareholders, and most owners of its stock understand this.

The point is…

High-yielding stocks are nice to own, but like any good team — well-constructed portfolios are very much like championship sports franchises — you’ve got to have different components to handle all sorts of economic and business environments.

Filling your portfolio entirely with utilities such as Fortis Inc. (TSX:FTS)(NYS:FTS) might provide stable income, but it’s not going to get you that vacation home at Whistler. Owning more than one or two utility stocks in your portfolio is like keeping more than one or two kickers on a professional football team’s active roster. It might be the best way to ensure you have a healthy kicker when the game’s on the line, but you’re probably not going to get in a position to win playing it that safe.

To outperform the TSX, S&P 500, MSCI EAFE, or some other benchmark, you’ve got to own more than a few stocks that are less concerned about writing you a cheque every three months and more concerned about growing earnings by double digits every year.

Warren Buffett might love dividends, but I can assure you, he would rather see earnings growth without dividends than dividends without earnings growth.

The next time you buy a stock, remember what drives share prices and build yourself the Anti-Yield-Hog portfolio.

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Fool contributor Will Ashworth has no position in any stocks mentioned. CCL Industries is a recommendation of Stock Advisor Canada.

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