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 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 your results become even greater. Take Hershey (NYSE: HSY ) for example. Since the late 1960s, Hershey's share price has increased 5,500%. But add in reinvested dividends, and total returns jump to over 21,000%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Hershey's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for other food companies like Sara Lee (NYSE: SLE ) and Snyder's-Lance (Nasdaq: LNCE ) ; 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 those dividend payouts, and your commitment to reinvest them.
And how do Hershey's dividends look? Its current yield, 2.4%, is about on par with the market average, but the company makes up for it in staying power: Hershey has paid a dividend every year since at least 1988, raising its payout every year except 2009, and at an average rate of nearly 10% per year. Over the past five years, dividends have used up an average of 50% of free cash flow, which is on the conservative side and should allow the company's dividend to safely grow into the 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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