The Dow Should Be at 250,000

If you're like me, browsing through academic papers can make your eyes glaze over. I'd give you some examples, but then you might fall asleep and miss the rest of this article. There are exceptions, though, such as an eye-opening finding I ran across recently. It addressed the flaws of the Dow Jones Industrial Average (DJIA) -- a topic I find so interesting that I've written about it before, in "Why the Dow Makes Little Sense."

The paper addressed a problem with the Dow that I confess I hadn't thought about too much: The index is not only limited to just 30 companies, and not only weighted by their stock prices, but ... it also excludes dividends!

You might not think that's such a big deal. You might think, for example, of a company such as 3M (NYSE: MMM), which happens to be a Dow component. Over the past 20 years, its stock has appreciated sevenfold, averaging about 10% annually. That's impressive, and market-beating, and what you might expect from a healthy, growing company. You might note to yourself that it's a dividend payer offering a 2.6% yield. That's nice, but not eye-popping, right? Well, note that 3M's quarterly dividend has grown over time, too, from $0.1625 per share 20 years ago to $0.51 today. That's nearly a 6% average annual growth rate.

Caterpillar's (NYSE: CAT) dividend has grown at an annual average of 13%, about as fast as the stock has grown. Coca-Cola's (NYSE: KO) dividend has grown faster than the share price has over the past two decades, as has McDonald's -- and McDonald's has upped its payout more than 28-fold, averaging 18% annually. Clearly, these companies' dividends are not inconsequential.

Dividend companies can be surprisingly powerful -- and they're stocks that keep paying you back.

A big deal
So just how much of a difference would it have made in the Dow, which is currently around 10,000, if dividends had been factored in? Well, according to John Shoven and Clemens Sialm of Stanford, "If Dow Jones & Co. had included dividend returns in the DJIA when it was reformed in 1928, the index would be over 250,000 today." Wow -- 250,000!

Dividend growth is no joke. Many dividends can double in just six years, and then double again. In "The Secret of Dividends," my colleague Shannon Zimmerman explained that between January 1926 and December 2006, "41% of the S&P 500's total return was due not to the price appreciation of the stocks in the index, but to the dividends its companies paid out." That's what dividends can do not only to a stock index, but also to your portfolio.

What to do
So never underestimate the power and importance of dividends. Sure, you can get rich without them, but you might be able to do so getting much more sleep at night by investing in dividend payers that are positioned to reliably keep paying you. They're not all boring utilities or tire manufacturers, either. Today, even a bunch of big software and hardware companies pay respectable dividends.

Here are a few companies with yields of 2.5% or more and respectable five-year dividend growth rates. You might want to research them further, or perhaps just let us point you to some compelling stocks, with a free trial of our Income Investor newsletter. Some of its recommendations offer yields north of 8%.

Data: Motley Fool CAPS.

Remember that dividends are never guaranteed, but some are darn reliable, and they can take your portfolio to unexpected heights.

Longtime Fool contributor Selena Maranjian owns shares of 3M, McDonald's, Coca-Cola, and PepsiCo. Intel, Coca-Cola, and 3M are Motley Fool Inside Value selections. Coca-Cola and PepsiCo are Motley Fool Income Investor picks. The Fool owns shares of Intel. The Motley Fool is Fools writing for Fools.