Free Money

While debate often swirls over the best investing strategy, decades of stock market data support only one conclusion: Nothing beats free money.

Introducing dividends
Jeremy Siegel, the market's so-called demented dividend guru, performed a study of stocks over 200 years and found that real returns equaled about 7% annually, easily the best deal of all asset classes available to investors.

But it was the stocks that paid dividends that did best. From 1957 to 2003, Siegel found that high-yielding dividend payers were far more likely to beat the market. And the highest yielders beat the S&P 500 index by more than four percentage points annually.

What's a dividend? Quite simply, it's a promised cash payout to investors. Think of it as a profit-sharing plan for stockholders, most often paid quarterly. If you hold a dividend-paying stock in a brokerage account, the dividend will show up as a cash deposit on your statement. If you hold certificates bought directly from a company, you'll receive a check in the mail.

Compounding profits
Sure, you could bank the cash, but your best bet may be to reinvest the proceeds and purchase more shares of the company that paid the dividend. Reinvested dividends act like compound interest by increasing your buying power. For example, J. M. Smucker (NYSE: SJM  ) recently announced a $0.28-per-share dividend to be paid to shareholders on September 1. That's $28 for every 100 shares owned, enough to purchase a 0.609 fractional share of Smucker at its recent closing price of $46.01 ($28 / $46.01 = 0.609).

Next quarter, you'd have 100.609 shares on which the company owes you a cut of its profits. That's $28.17 instead of $28, assuming that the dividend remains steady.

It's thanks to reinvested dividends that Altria (NYSE: MO  ) , formerly known as Philip Morris, outpaced the market by more than 9% annually over the 46 years of Siegel's study, beating all other stocks during the same period.

How to reinvest
Brokers are generally very helpful when it comes to reinvesting dividends. Most often, you'll simply choose an option online to have the dividends from the stocks you own reinvested. Better still, the service is often free. Here's a short rundown of what I learned in a recent survey of popular brokerages.


Dividend reinvestment?

Charles Schwab








TD Ameritrade


Restrictions may apply. Please contact your broker for more information.

Follow the money
Sometimes free isn't so good, like getting two ugly shirts for the price of one. All that leaves you with is two ugly shirts you won't wear. But when it comes to stocks and investing, found money in the form of dividends is about as good as it gets. And since the service is free at most brokerages, it's never been cheaper to cash in.

Have other money tips? Tell me. I'm writing new articles on personal finance and investing basics every week as part of our newsletter service, Motley Fool GreenLight. It's tailor-made for Fools like you who aim to take control of their financial destiny. Want to learn more? Just click here.

Fool contributor Tim Beyers reinvests dividends regularly. He also brushes his teeth and eats his veggies. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Check out all of his stock holdings at Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 506122, ~/Articles/ArticleHandler.aspx, 10/25/2016 6:47:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,169.27 -53.76 -0.30%
S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 4:00 PM
MO $64.71 Down -0.24 -0.37%
Altria Group CAPS Rating: ****
SJM $130.19 Up +0.30 +0.23%
J.M. Smucker CAPS Rating: *****