In 1993, the SPDRs exchange-traded fund, which tracked the S&P 500, made its debut. In the nearly 14 years since then, an investment in that fund would have quadrupled your money. That's not bad.
But not all of that return came from a rise in the stocks of the S&P 500. No, quite a bit of it was the product of boring old dividends. In fact, on a $1,000 investment that turned into $3,730, $470 came from dividends. That's more than 15% of the total profits.
And that is not an aberration. It's actually low. Historically, a full 40% of the market's return was from dividends. So as easy as it may be to ignore those payments in the short term when doing stock research, know that they add up over time to big returns.
It gets better
Of course, hardly anyone invests simply for the dividends. Yet literally hundreds of companies are known for delivering great payments, year after year. If you actively seek them out, you can see a tremendous difference between the money you get from capital gains and your total return, which includes that extra cash.
Take a look at the returns from these dividend dynamos, over the same period of time that the fund has been in existence.
|
Company |
Gain Only (No Dividends) |
Total Return (With Dividends) |
Dividend Difference on $1,000 Investment |
Dividend Percentage of Total Return |
|---|---|---|---|---|
|
Briggs & Stratton |
146.1% |
218.9% |
$727.73 |
33.2% |
|
Pfizer |
384.4% |
489.4% |
$1,050.30 |
21.5% |
|
Pinnacle West Capital |
211.9% |
329.1% |
$1,171.78 |
35.6% |
|
Chevron |
286.8% |
386.6% |
$997.75 |
25.8% |
|
Bank of America |
297.2% |
408.5% |
$1,112.93 |
27.2% |
|
Kinder Morgan Energy Partners |
625.8% |
977.6% |
$3,518.71 |
36.0% |
|
Average |
325.4% |
468.4% |
$1,429.87 |
29.9% |
In just less than 14 years, the difference between capital gain and total return is staggering. In fact, 30% of the total return came just from the payment of dividends. On average in these dividend-friendly companies, you would have gotten your initial investment back and then some, just thanks to the dividends. Reinvest those payments rather than take them as cash, and the total return on your initial investment would have been even higher. Imagine taking that gap and expanding it over your entire investing career. If it's that large now, imagine it after 30, 40, even 50 years.
A lifetime strategy
Yes, that 50-year look forward is appropriate to dividend-focused investors who expect to still be around then. It's even appropriate for those who don't but would like to leave a substantial legacy to their families. After all, dividends most often come in the form of convenient, easy-to-spend cash. During your working years, you can reinvest those payments to help boost your total returns. Once you're retired, you can simply start taking those dividends as cash. Presto! You've got an instant, built-in cash flow machine to help you meet your retirement lifestyle needs.
If you're serious about making money from your investing, then you need to pay attention to your dividends. Over time, those little payments certainly add up to create great wealth. At Motley Fool Income Investor, lead advisor James Early understands just how powerful those seemingly tiny distributions can be. That's why every month, he picks two companies that look best suited to deliver decent dividends to their shareholders. Join us now for a free 30-day trial to start benefiting from all of the rewards the stock market has to offer.
At the time of publication, Fool contributor Chuck Saletta owned shares of Bank of America and Kinder Morgan Management, a related company to Kinder Morgan Energy Partners. Bank of America is an Income Investor pick. Pfizer is an Inside Value recommendation. The Fool has a disclosure policy.
