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 shared 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 on price gyrations, yet dividends have historically accounted for more than half of total returns.
Reinvest those dividends, and your results become even greater. Take General Electric (NYSE: GE ) for example. Since the late 1960s, GE's shares have increased roughly 1,800%. But add in reinvested dividends, and total returns jump to 6,700%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, GE's share appreciation alone has paled in importance to the power of its reinvested dividends. For long-term investors, total returns today are actually higher than share growth alone delivered when GE's stock peaked in 2000. The results are similar for other conglomerates such as Siemens (NYSE: SI ) and Tyco (NYSE: TYC ) . 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 GE's dividends look? The company slashed its dividend during the recession after losses from its financial arm hemorrhaged. The payout has since been raised but is still less than half of where it was before the crisis. Even so, at 3.1%, its yield is above the market average. In recent conference calls, GE management expressed its devotion to returning cash to shareholders and its emphasis on dividends. "[W]e want the dividend to be an effective payout ratio, a good yield, very reliable," said CEO Jeff Immelt. "And so over time, we're going to get back to an annual dividend increase that … investors can count on."
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.