Only one person likes dividends more than investors do: Uncle Sam. These periodic cash payments to investors are welcome cash, but they're taxed yearly for most investors.
There's another way to get the economic benefit of dividends, without the immediate tax hit. There's a rare collection of five stocks in the Standard & Poor's 500, including generic drug maker Actavis, TV broadcaster DirecTV and online marketplace Priceline.com that pull off the trick. These stocks pay no dividends, and yet, have beaten the market consistently each and every of the past five years.
Why is this is a big deal? Uncle Sam's nightmare scenario are stocks that beat the market on a consistent basis by at least 2 percentage points, but pay no dividend. That means investors get the 2% wealth boost they would have gotten from a dividend, but don't don't have to pay taxes until they sell, which could be never with clever estate planning. The S&P 500 currently has a dividend yield of roughly 2%.
Consider Actavis, a maker of generic drugs primarily under the Watson label. Last year, the company paid no dividend, but investors hardly noticed since the stock rose 95.3%, topping the 29.7% gain by the S&P 500. It was the same story in 2012. Shares of Actavis soared 42.5%, topping the S&P 500′s gain by 29 percentage points, so who minds missing out on the dividend? Rinse and repeat for the previous three years, and you get the idea.
Over at Priceline, which pays no dividend, the stock rose 87.4% last year, beating the market's gain by nearly 58 percentage points. And in 2012, Priceline shares rose 32.6%, beating the S&P 500′s 13.5% gain.
You can see how well these stocks have performed, as a market weighted group, versus the S&P 500: