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 Universal Corp. (NYSE: UVV ) , for example. Since the late 1960s, the company's share price has increased 2,300%. But add in reinvested dividends, and total returns jump to 15,000%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Universal's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for others in the tobacco industry like Altria (NYSE: MO ) and Reynolds American (NYSE: RAI ) ; 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 Universal's dividends look? At 4.8%, its yield is far above the market average. The company has paid a dividend every year since 1927, increasing its payout every year for 40 years. That's among the best dividend records of any American company. In many respects, the tobacco industry is not what it used to be, but pricing power should help keep companies in this space humming for years. Combine that with an excellent dividend track record, and Universal should provide above-average returns for the foreseeable future.
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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