The Extraordinary Power of Dividends: Chevron 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 it's even greater. Take Chevron (NYSE: CVX  ) for example. Since the late 1960s, Chevron's share price has increased 2,800%. But add in reinvested dividends, and total returns jump to over 18,000%:

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

There's no ambiguity here: Over time, Chevron's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for competitors ExxonMobil (NYSE: XOM  ) and BP (NYSE: BP  ) . Reinvested dividends skew both companies' long-term results 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 Chevron's dividends look? The company has paid a dividend every year since 1912.

At 2.9%, its current yield is above the market average, and on par with most competitors. Dividends have used up about half of free cash flow in recent years, leaving room for both future growth and the occasional ding to earnings during recessions -- as happened in 2009. Like most big oil companies, Chevron should produce steady, respectable dividend results 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 Exxon. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Chevron. 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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Related Tickers

4/24/2014 12:25 PM
CVX $124.52 Down -0.17 -0.14%
Chevron Corp CAPS Rating: ****
BP $49.38 Up +0.57 +1.16%
BP p.l.c. (ADR) CAPS Rating: ****
XOM $100.27 Down -0.23 -0.23%
ExxonMobil Corp CAPS Rating: ****

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