Want to Beat the Nasdaq? Try Dividends.

Dividends boosted the S&P 500’s returns versus the Nasdaq over the past five years. (Michael Nagle/Bloomberg)

Want to beat the Nasdaq? Dividends may be the key.

Tech stocks have had a great run lately. The Fidelity Nasdaq Composite ETF, a popular exchange-traded fund that tracks the tech-centric index, has doubled investors’ money over the past five years, posting a cumulative total return of 100.2%.

But the S&P 500 —designed to track the most valuable companies across the stock market—has done even better, according to a note Wednesday by market researcher DataTrek. The iShares Core S&P 500 ETF has returned 103.9% over the past five years.

The difference maker is dividends, which fast-growing technology companies famously skimp on. Dividends boosted the S&P 500’s returns by 14.5 percentage points over that five-year period, compared with just 7.2 points for the Nasdaq.

The contrast “explains the longer-run the value of reinvesting dividends,” wrote DataTrek co-founder Nicholas Colas. “The more diversified index can best the one holding more concentrated positions in high-profile growth stocks.”

There are, of course, come caveats. While tech and communications stocks represent about two-thirds of the Nasdaq index, they also make up a large, and growing, share of the S&P 500, at about 45%.

However, investors who tilt their portfolios too far toward dividends—through mutual funds that target companies with hefty dividends, or companies that consistently raise dividends—haven’t fared as well. The $100 billion Vanguard Dividend Appreciation Index fund, which targets blue chip companies that consistently raise dividends, has delivered a cumulative return of just 80% in the past five years.

What’s more, there may be good reasons for tech companies’ stinginess when it comes to quarterly dividend checks. Many of the largest ones have been plowing money into the race to develop artificial intelligence that could soon transform the economy. Alphabet alone said it plans to spend more than $85 billion on capital projects this year in an effort to protect its Google search business.

Tech companies clearly think their own businesses will grow cash faster than whatever else their shareholders might choose to invest in.

“That compounding effect, where a company can earn more on its reinvested capital than a shareholder can earn with their dividend check, is at the core of the current generative artificial intelligence trade,” writes Colas. “Markets believe the capital currently being deployed will earn very high future returns.”

Those outsize future returns are certainly a possibility. But they also represent a big gamble: Stock valuations have floated up into thin air not seen since the 1990s dot-com era, and AI has yet to show it can deliver the real-world productivity gains its supporters claim.

In the meantime, dividends are great way for investors to hedge their bets.

Write to Ian Salisbury at ian.salisbury@barrons.com