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 CVS Caremark (NYSE: CVS ) , for example. Since the late 1960s, the company's share price has increased 5,100%. But add in reinvested dividends, and total returns jump to over 13,500%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, CVS' share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for competitors Walgreen (NYSE: WAG ) and Wal-Mart (NYSE: WMT ) ; 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 CVS' dividends look? At 1.5%, its dividend is actually slightly below the market average. Dividends have used up an average of 20% of free cash flow over the past five years. That's a very conservative level that should allow CVS to continue its dividend for years to come, and leaves plenty of room for growth. On a recent conference call, management agreed: "Given our strong free cash flow outlook, our ability to return significant value to our shareholders should continue now and well 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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