How Dividends Change the Game for This Dow Stock

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The wealth-building power of compound interest will never cease to amaze me.

It's a story of patience and attention to detail, where small differences in short timescales add up to massive divergence over decades. In the end, the biggest winners don't always deliver the fattest share-price returns.

Credit card veteran American Express (NYSE: AXP  ) provides a crystal-clear example of what I'm talking about. The stock has outperformed its Dow Jones Industrial Average (INDEX: ^DJI  ) peers by a very comfortable margin over the last two decades:

AXP Chart

AXP data by YCharts

...but if you thought that chart was impressive, you really ain't seen nothing yet. Just wait until I show you how American Express rewards its shareholders when they reinvest dividends along the way. I'm including American Express' plain-Jane share price returns, again, just to give you a sense of scale:

AXP Total Return Price Chart

AXP Total Return Price data by YCharts

The no-brainer decision to buy more American Express shares with every payout check totally changes the game. A 680% return over 20 years turns into a 1,300% gain. We're jumping from an eight-bagger to scoring 14 times your original investment -- nearly doubling your total return. In terms of annual returns, you're moving from an admittedly impressive 11% yield to a 14% yearly return. The 3% annual difference may sound small, but these numbers really do add up over time.

I can't show you graphs like these for sector rivals Visa (NYSE: V  ) , MasterCard (NYSE: MA  ) , and Discover Financial Services (NYSE: DFS  ) , because none of them have been trading on the public markets for 20 years -- but American Express sold its first share way back in 1978. Also, none of their dividend yields can hold a candle to the 1.4% payout you currently get from American Express. In time, their total returns might match the fantastic charts we've seen here -- but American Express is a proven dividend champion.

And here's the kicker: This company could have crushed the market even harder, if management had poured more cash into dividends. American Express has never really put its back into dividend payments, which leaves a lot of room for future raises, and also provides a nice cushion when times are hard. The financial crisis of 2008 didn't even stress this rock-solid dividend policy much:

AXP Payout Ratio TTM Chart

AXP Payout Ratio TTM data by YCharts

It's no wonder why master investor Warren Buffett loves American Express and its shareholder-friendly policies. You don't have to be a market wizard to follow his stellar example.

If you're looking for some long-term investing ideas, let me invite you to read the Fool's brand-new special repo, The 3 Dow Stocks Dividend Investors Need. It's absolutely free, so just click here and get your copy today.

Fool contributor Anders Bylundhas no positions in the stocks mentioned above. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend American Express and Visa. 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

10/27/2016 12:40 PM
^DJI $18202.63 Up +3.30 +0.02%
AXP $66.82 Up +0.02 +0.03%
American Express CAPS Rating: ****
DFS $56.95 Up +0.06 +0.10%
Discover Financial… CAPS Rating: *****
MA $103.84 Up +0.62 +0.60%
MasterCard CAPS Rating: *****
V $81.84 Up +0.09 +0.11%
Visa CAPS Rating: *****