The Extraordinary Power of Dividends: Altria Edition

I took my first investing class as a teenager, and one moment stands out in my memory. A fellow student asked the instructor, a stockbroker, about dividends.

"Dividends?" he asked. "I'm trying to make my clients wealthy. You don't do that waiting for tiny checks in the mailbox every quarter."

Even then, I had enough horse sense to know he was wrong. Paying attention to dividends is exactly how you become wealthy over time.

Wharton professor Jeremy Siegel made a wonderful discovery in his book The Future for Investors. The greatest long-term returns typically don't come from the most innovative companies, or even companies with the highest earnings growth. They come from companies that happen to crank out dividends year after year. Simply put, since the 1950s, "the portfolios with higher dividend yields offered investors higher returns."

Market commentary regularly centers around price gyrations, yet dividends have historically accounted for more than half of total returns.

Reinvest those dividends, and the results are magnitudes greater. Take, for example, Altria Group (NYSE: MO  ) . Altria's shares have increased 11,000% since the late 1960s. But factor in reinvested dividends, and the total return jumps to 278,000%:

Source: Capital IQ, a division of Standard & Poor's.

There's no ambiguity here: Over time, Altria's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for competitors Reynolds American (NYSE: RAI  ) and Lorillard (NYSE: LO  ) , both of whose total long-term returns are overwhelmingly skewed higher by reinvested dividends. If you're a shareholder, you should devote your attention overwhelmingly toward those dividend payouts and your commitment to reinvest them -- not toward daily, or even yearly, share wobbles.

And how do those dividends look? Altria has paid a dividend every year since 1928. Its current yield -- 5.6% -- roughly doubles the broader market average. Altria's dividend sucks up the majority of the company's free cash flow -- and occasionally more -- which highlights two points. First, this is an exceedingly shareholder-centric company. Second, smoking rates have been declining for decades. For long-term investors, Altria's pricing power remains intact, and the company should be able to generate dividends for years to come.

To earn the greatest returns, get your priorities straight. What the market does is less important than what your company earns. What your company earns is less important than how much it pays out in dividends. And what it pays out in dividends is less important than whether you reinvest those dividends.

Fool contributor Morgan Housel owns shares of Altria. Follow him on Twitter @TMFHouselClick here to see his holdings and a short bio. The Motley Fool owns shares of Altria Group. Motley Fool newsletter services have recommended writing puts in Lorillard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (15)

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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 July 15, 2011, at 10:55 AM, mm5525 wrote:

    Excellent article. Dividends have gotten far more popular in the environment of low interest rates the past few years, but I totally agree with the author about a: How dividends were laughed at by the masses in the past and b: How important they really are. Those "small checks in the mailbox" add up, and given the fluctuations of the markets through the decades, what could be better than getting some regular return from your investment without ever having to hit the sell button? Dividend reinvesting is a huge key, and within my holdings I plan on reinvesting religiously for another @ 10 years or so before I begin to use that income. Excellent article, Morgan.

  • Report this Comment On July 15, 2011, at 11:07 AM, sthomas0 wrote:

    Great article Morgan. I've owned MO for a while, but the new legislation about cigarette packaging labels has me nervous about MO's future ... can you please comment on your thoughts on MO's future given this current climate?

    Thank you.

  • Report this Comment On July 15, 2011, at 3:14 PM, energysystems wrote:

    sthomas0-You could always look to switch to PM. Gets away from the no growth US market, and into the world market.

    I hear the same things about dividend stocks, about how those little quarterly checks don't add up. I'm 25, and have about 50k in dividenders(Not much, but a decent start). All are consistent payers with long track records, and I'm re-investing all my dividends for that IRA. I've got another 25-35 years of re-investing, and have conservatively mapped out to see how many shares of each holding I'll end up with(with no additional investment, no capital appreciation, and no dividend growth). Most holdings go from 100-200 shares, to over 1000. Most annual dividend payouts would be equal to 1/3 to 1/2 of my original investment. Sounds good enough to me.

  • Report this Comment On July 15, 2011, at 5:59 PM, blackie45 wrote:

    I agree with the author ,I bought altria in the mid 1990's.I turned 8,500 dollars into 210,000 today.Plus shares of kraft and pm.the co. is very shareholder friendly.

  • Report this Comment On July 18, 2011, at 10:48 AM, financeguy85 wrote:

    Morgan--

    THANK YOU!!! Once again you have proven why you are one of the best on this site. Now if you could please forward this to your colleague Chris Baines among others who foolishly (small f) deride dividends for God only knows why. Then I might frequent this site more often. But your articles, as always, are spot-on. Kudos.

  • Report this Comment On July 20, 2011, at 3:26 AM, mm5525 wrote:

    I don't see how on earth anyone would ridicule dividends. Just by reinvesting them year after year (commission free) will make your future dividend payouts larger and larger even if the company doesn't raise the dividend ever again. Obviously, most companies do raise regularly, such as MO, PM, or PG for example. As I said in my first post, what makes dividends so great IMO is you never have to hit the sell button to still get regularly scheduled fruits from your investment. Given I own several dividend stocks and energy MLPs, as well as rental properties, if I ever had to count on income, I'd much rather count on dividend income from multi-million/billion dollar corporations than my tenants. So I would rather reinvest religiously for another decade or so before using the income, again without ever having to hit the sell button.

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