How Dividend Stocks Will Make You Rich

The easiest way to build wealth in the stock market is to invest regularly and watch your investments grow over long periods of time. Buying dividend stocks is the perfect way to make the most of the long-term power of compounding returns, especially if you take the important step of reinvesting those dividends.

A quick look at the evidence
If you want an investment that will stand up for the long haul, dividend stocks have a lot going for them. Here are just some of the ways that dividend stocks have made shareholders wealthy over the decades:

  • According to stock researcher Jeremy Siegel, high-yielding dividend stocks have higher total returns than low- or no-dividend stocks.
  • All 20 of the top-performing surviving stocks from the original 1957 lineup of the S&P 500 pay dividends.

Nowadays, a lot of the attention that dividend stocks are getting comes from two big factors. First, with bonds and other fixed-income investments producing almost no income, many income-hungry investors have no choice but to look to the stock market for dividend stocks that will pay them the regular income they need. Second, with the overall market having been flat to lower over the past several years, investors know they can't count on capital gains to provide them with big returns, so they're instead looking for companies that offer solid dividend payouts as a major component of their total returns.

Gaining the broader perspective
Unfortunately, a lot of those reasons for getting into dividend stocks are short term in nature. Whenever bond and CD yields start to rise again, then the same investors who piled into dividend stocks for income may well start piling out of them again. If certain stocks post big gains, then performance-chasing investors may give up on dividend stocks in favor of those hot sectors of the market -- only after most of the gains have already been made.

The better argument in favor of dividend stocks demands a long-term perspective. For instance, Siegel also found that over a 130-year period, a whopping 97% of the total return from stocks came from reinvested dividends. That's right: Only 3% of aggregate returns since the 1870s came from capital gains on the originally purchased shares.

Even over shorter periods of time, the impact of reinvesting dividends can be quite pronounced. To give you an idea of how this has worked, I looked for four- and five-star CAPS-rated stocks with dividend yields over 2.5% and a 25-year history of raising annual dividends. Then I compared how much you would have made from buying $10,000 in shares back in 1980 and spending any dividend cash you received versus reinvesting those dividends in additional shares. The differences were astounding:

Stock

Value of Original Shares Bought in 1980

Total Value With Reinvested Dividends

Procter & Gamble (NYSE: PG  )

$241,916

$548,091

Johnson & Johnson (NYSE: JNJ  )

$354,213

$665,393

McDonald's (NYSE: MCD  )

$600,529

$903,951

ExxonMobil (NYSE: XOM  )

$138,286

$511,092

3M (NYSE: MMM  )

$114,253

$301,398

Coca-Cola (NYSE: KO  )

$378,019

$837,612

Colgate-Palmolive (NYSE: CL  )

$817,647

$2,636,207

Source: Yahoo! Finance.

As you can see, reinvesting dividends over 30 years in some cases more than tripled already very good returns rather than keeping your original shares.

How does reinvesting work? With stocks like these that consistently raise their dividends, you gain from the fact that your dividends buy more shares when stock prices are low, leading to bigger gains when the stock rebounds. Moreover, even though these stocks have risen steadily over time, their growing payouts have kept pace or in some cases even outpaced those rises, keeping dividend yields high and providing an ongoing stream of income to support new purchases of reinvested shares.

Start getting rich today
So if you think dividend stocks are too boring to make you wealthy, think again. Now more than ever, taking a disciplined long-term approach to investing is the best way to prosper in an uncertain market.

Find out from Selena Maranjian how dividend stocks can help you defend against deflation.

Fool contributor Dan Caplinger never expects to get rich overnight. He doesn't own shares of the companies mentioned above. Coca-Cola and 3M are Motley Fool Inside Value choices. Johnson & Johnson, Coca-Cola, and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of and has written covered calls on Procter & Gamble. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Coca-Cola and ExxonMobil. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is rich with information.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 24, 2010, at 4:39 PM, andantewalker wrote:

    At current Stock Market decline rate dividends don't matter. In ten days decline is -6.73%. It will take two years to recoup losses, not to mention great leader Obama. tax increase on dividends.

  • Report this Comment On August 26, 2010, at 11:21 PM, DonkeyJunk wrote:

    Read the whole article, andante--it's based on a 30-year window example, not 10 days. This is not an article for day traders.

  • Report this Comment On September 07, 2013, at 8:17 AM, NickD wrote:

    I love money from my dividends.

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