The Extraordinary Power of Dividends: Johnson & Johnson Edition

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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 half of total returns.                                                                                      

Reinvest those dividends, and it's even greater. Take Johnson & Johnson (NYSE: JNJ  ) , for example. Since the late 1960s, J&J's shares have increased 10,600%. But add in reinvested dividends, and total returns jump to 23,600%:

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

There's little ambiguity here: Over time, Johnson & Johnson 's share appreciation alone has been more than matched by the power of its reinvested dividends. The results are similar for competitors Baxter (NYSE: BAX  ) and Becton Dickinson (NYSE: BDX  ) ; reinvested dividends skew both companies' total long-term 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 Johnson & Johnson's dividends look? The company has paid a dividend every year since at least 1962, with 49 consecutive yearly increases. This is truly one of the great dividend achievements of our time. Over the past five years, dividends have used up 40% of J&J's free cash flow -- a conservative figure that keeps its payout safe from impending cuts and provides room for future growth.

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 Johnson & Johnson. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Becton Dickinson, as well as creating a diagonal call position in Johnson & Johnson. 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.

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