The Secret of Dividends

Pssst. Want to know a secret?

Between January 1926 and December 2004, a whopping 41% of the S&P 500's total return owed not to the price appreciation of the stocks the index held but rather to the dividends its companies paid out. That's right -- a cool 41%. On an annualized basis, that amounts to a difference of 4.4 percentage points. To put it in dollar-and-cents terms, consider this: An investment of $10,000 over that stretch of time would have grown to $1,013,000 without dividends. With dividends kicked in and reinvested, however, that same sum would have been worth a whopping $24,113,000 by the end of the period.

Talk about the miracle of compound interest!

I learned most of the above from my colleague Mathew Emmert -- a Fool for dividends if ever there was one. Not coincidentally, he's the head honcho at Motley Fool Income Investor, the Fool newsletter dedicated to cherry-picking the market's most promising dividend-payers.

Mathew's newsletter provides an invaluable service because on its own, the fact that a company pays a dividend doesn't tell you a thing. Indeed, a fat payout figure can even be a bad sign if it'a the result of a stock price that's hit the skids -- see GM (NYSE: GM), Ford (NYSE: F), and auto-parts concern Delphi for gory details -- or if an examination of the company's cash flows indicates that its payout is unsustainable.

What's that? You don't have time to examine a company's cash flows? Not to worry -- Mathew does. And so far he's established quite the track record at Income Investor, identifying more than 40 top-notch dividend-payers that have what it takes to beat the market over the long haul. To date, Mathew's picks have outclassed the S&P's total return since the newsletter first opened for business, all while doubling up (and then some) on the 500's paltry yield of less than 2%.

Interested? Thought you might be. Indeed, I'd argue that even investors who generally favor growth-oriented fare like eBay (Nasdaq: EBAY), Yahoo! (Nasdaq: YHOO), Dell (Nasdaq: DELL), Research In Motion (Nasdaq: RIMM), and Google (Nasdaq: GOOG) -- none of which pays a dividend, by the way -- can benefit from Income Investor. A portfolio of nothing but race cars is likely to lead to bumps in the road after all -- and perhaps even the occasional crash.

With that in mind, I encourage you to take Mathew's newsletter for a risk-free spin by clicking right here. You'll have 30 days to explore the service -- including the Income Investor recommendations list and back-issue archives -- and you're under no obligation to continue if you find it's not your cup of tea.

But I highly doubt you'll feel that way. With so much of the market's long-haul return coming from its income-payers, every serious investor needs the inside scoop on dividends. And as it happens, that's precisely what Income Investor aims to deliver.

Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter service. He doesn't own any of the companies mentioned. Dell and eBay are Motley Fool Stock Advisor recommendations. The Fool has a strict disclosure policy.