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 gains get even greater. Take Kellogg (NYSE: K ) , for example. Since the late 1960s, the company's share price has increased 4,000%. But add in reinvested dividends, and total returns jump to more than 17,000%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Kellogg's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for others in the food industry such as ConAgra (NYSE: CAG ) and H.J. Heinz (NYSE: HNZ ) ; reinvested dividends skew both companies' total returns dramatically higher. If you're a long-term shareholder, don't worry about daily share wobbles. Devote your attention to those dividend payouts and your commitment to reinvest them.
And how do Kellogg's dividends look? At 3.2%, its yield is well above the market average. The company has paid a dividend every year since 1925. Over the past five years, dividends have used up an average of 70% of free cash flow. That's a fairly high figure, but Kellogg's history of emphasizing dividends suggests that significant cuts to its payout are unlikely. "We ... remain committed to returning cash to our share owners through dividends," CFO Ronald Dissinger said on a recent conference call.
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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