Want your stock picks to beat index funds? Look at companies with one key metric.
Long-term investors have been well served by index funds, which often charge very low fees and can be hard for active portfolio managers to beat. But some investors want to select individual stocks for portions of their portfolios. While it can be very difficult to pick those, a long-term look at quality financial performers might be an excellent way to begin your own research.
Among the S&P 500, 20 years of ROIC data is available from FactSet for 342 companies, and 20-year total returns are available for all but six. FactSet might have 20 years of ROIC data even for a company that hasn’t been publicly traded for 20 years: For example, Alphabet Inc. went public as Google Inc. in August 2004. For the remaining 336 companies in the S&P 500, these 20 have had the highest average returns on invested capital over the past 20 years:
15 out of 20 companies have beaten the S&P 500’s 20-year return
– Apple Inc.
– NVR Inc.
– Mastercard Inc.
– VeriSign Inc.
Apple Inc. has had the best 20-year and 10-year returns. For 10 years, Apple’s return has been double that of the second-best performer on the list, NVR Inc. And Apple’s 10-year average ROIC has been higher than its 20-year average ROIC. Mastercard Inc., with a 20-year average ROIC of 37.6%, would have made the top 20 list, but the company only went public in May 2026. The company’s average 10-year ROIC has been 46.2%. The stock has returned 538% over the past 10 years. VeriSign Inc. had has the highest ROIC by far among the S&P 500. The company has an exclusive right, granted by the Commerce Department, to maintain domain registrations for “.com” and “.net” internet addresses.
A company’s return on invested capital (ROIC) is a key metric that can shed light on its operating performance over the long term. ROIC is an annualized figure that highlights how efficiently a management team allocates capital. It shows how well a company makes use of the money investors have provided to run the business. When looking at the stock market as a whole, a broad approach to analyzing ROIC can help identify quality financial performers that might outperform index funds.
It’s important to note that ROIC can vary depending on the industry a company operates in and its capital structure. Generally, companies with low debt tend to have higher ROIC, while companies with significant borrowing may see their ROIC decrease, especially as interest rates rise.
Investors with different objectives can use ROIC as a starting point for their stock research. If you are looking to build up a stream of dividend income, investing in companies that have increased their dividend payouts might be a good approach. On the other hand, if your objective is growth, you might want to focus on identifying the next hot trend or set of trends. Index funds, such as the SPDR S&P 500 ETF Trust, have been a popular choice for investors seeking to ride along with the U.S. benchmark index. This fund has returned 542% over the past 20 years, with an average annual return of 9.7%.
Remember, selecting individual stocks can be challenging, and there is no guarantee of outperforming index funds. Conducting thorough research and considering various factors, including ROIC, can help guide your investment decisions.
Analyst comment
Positive news: The article highlights 15 companies that have beaten the S&P 500’s 20-year return, indicating potential for strong performance. The focus on ROIC as a key metric for long-term performance is valuable for investors looking to select individual stocks.
Market analysis: Investors may consider incorporating companies with strong ROIC into their portfolios for potential outperformance. However, it is important to conduct thorough research and consider other factors before making investment decisions.
