Rising interest rates prompted many investors to rotate from dividend stocks toward higher-yielding fixed-income investments like bonds, T-bills, and CDs over the past year. That might seem like a prudent move, but the right dividend stocks also perform in a rising interest rate environment, and they tend to outperform those conservative investments with rising share prices and compounded returns.
Over the past two decades, a modest $3,000 investment in Taiwan Semiconductor Manufacturing (TSM -3.45%), Procter & Gamble (PG 0.54%), and Target (TGT 1.03%) would have blossomed into roughly $87,000, $17,000, and $23,000, respectively, if you had reinvested their dividends through a dividend reinvestment (DRIP) plan. Let's see why those three blue-chip stocks generated such impressive gains -- and why they can still supercharge your portfolio's total returns over the next few decades.
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1. TSMC
Taiwan Semiconductor Manufacturing, also known as TSMC, is the world's largest and most advanced contract chipmaker. Over the past 20 years, it generated a total return of 2,790% after accounting for its reinvested dividends. Its success was driven by its ability to consistently produce smaller, denser, and more power-efficient chips as the rising production costs forced other foundries to abandon the market.
Between 1999 and 2022, TSMC shrank its smallest chips from 180 nm to 3 nm. That miniaturization enabled chipmakers to develop increasingly powerful chips for PCs, smartphones, data centers, connected vehicles, and other products. TSMC is still at least one to two generations ahead of Intel and Samsung, its two remaining competitors in the high-end foundry market.
TSMC faces a near-term slowdown as sales of PCs, smartphones, and data center chips cool off in a post-pandemic market. But between 2022 and 2025, analysts still expect its revenue to rise at a compound annual growth rate (CAGR) of 11% as its net income increases at a CAGR of 6%. The stock still looks cheap at 16 times forward earnings, it pays an attractive forward dividend yield of 2.3%, and it should remain one of the best plays on the secular growth of the semiconductor market.
2. Procter & Gamble
Procter & Gamble owns 65 well-known consumer brands -- including Tide, Pampers, Tampax, Charmin, Gillette, Oral-B, Head & Shoulders, and SK-II -- and its stock generated a total return of nearly 460% over the past 20 years. This blue-chip stalwart delivers such consistent gains because it's well-diversified, it's insulated from economic downturns, and it locks in investors with a dividend that it's raised for 66 consecutive years.
P&G faces some near-term headwinds from a strong dollar, higher commodity prices, and elevated freight costs, but it's offsetting a lot of that pressure with incremental price hikes. For fiscal 2023 (which ends this July), it expects its organic sales to rise 4%-5% as its core EPS increases 0%-4%. Between 2022 and 2025, analysts expect its reported revenue to grow at a CAGR of 3% as its EPS rises at a CAGR of 6%.
Those growth rates might seem anemic, but those slow and stable returns will likely attract more investors as rising rates and other macro headwinds rattle the markets. The stock is still reasonably valued at 23 times forward earnings and it pays a decent forward yield of 2.5%. That stability makes it a great core holding for long-term investors.
3. Target
Target is a superstore retailer that operates 1,948 stores domestically. Roughly three-quarters of the U.S. population already lives within 10 miles of a Target store, and it uses those locations to fulfill its online orders and in-store pickups. That firm foundation -- along with its e-commerce upgrades, store renovations, and private-label brands -- enabled Target to keep pace with Amazon as other brick-and-mortar retailers crumbled.
Over the past 20 years, Target generated a total return of more than 670%. It's also raised its dividend for 51 consecutive years, making it a Dividend King like P&G, meaning it's hiked its payout annually for at least 50 straight years. It currently pays a forward yield of 2.7% and trades at a reasonable 19 times forward earnings.
Target faces a near-term slowdown as it grapples with inflation and markdowns, but it made significant progress last year by finally reducing its year-end inventories. It expects its comparable store sales to come in roughly flat in fiscal 2023 (which started on Jan. 30), but it also sees its adjusted EPS rising 29%-45% as it moves past its markdowns and tightens its spending. Analysts expect its revenue to only rise a CAGR of 2% between fiscal 2022 and fiscal 2025, but they expect its EPS to grow at a CAGR of 29% as its operating margins return to its pre-pandemic levels. We should take those estimates with a grain of salt, but Target has endured plenty of economic downturns and will likely continue to grow for decades to come.
