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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.
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