Don't Ignore These Incredible Returns

As an investor, there are two parts to the returns you'll see: changes in price, and dividends received. Of the two, price changes get the most attention, blaring away in real time on TV, radio, and financial web sites, whenever the market is open.

Stock prices get all the attention because they're always on the move, and they have an immediate impact on your net worth. They're important, of course, but they only tell a portion of the story. On a day to day basis, dividends may be easy to ignore, but over the long haul, those payments matter a great deal to your bottom line.

Why dividends matter
The cash in your pocket is certainly a key benefit of owning a dividend paying company, but in truth, it's only a small part of why dividends are so critical to your long run results. At least as important as the payout itself is the discipline that being able to make it enforces in the company.

You see, for you to receive a cash dividend, the company has to have the cash on hand to make the payment. That means its balance sheet needs to clean enough to enable the payment to shareholders without enraging the bondholders who have priority on company money. It also means that the company's operations need to generate actual cash, not just accounting earnings.

And over time, if a company intends to keep paying its dividends, it needs to be careful in how it invests the rest of the money it generates. After all, those dividends require serious commitments of cash. If a company manages to blow the rest of its available capital on bad investments, those dividends quickly get put at risk. As a result, once a company establishes a regular dividend, the extra scrutiny its capital allocation gets can help ensure that better decisions are made.

The benefits you see directly
While the dividend-enforced discipline helps keep a company strong, that only indirectly helps you as a shareholder. To your pocketbook, the money is still what counts. But what you do with the money you get matters even more.

Imagine you had invested $1,000 twenty-five years ago in each of a handful of companies that had already established themselves as dividend payers. This table shows what you would have ended up with, depending on nothing more than what you did with those dividends:

Data from Yahoo! Finance.

The differences are staggering. Check out the increase in what you'd have to your name simply by reinvesting your dividends over either spending them or keeping them as cash. Same companies. Same long-term share price growth. A tremendous difference in your personal balance sheet.

What will you do?
If you want to ignore that kind of extra money and the effect it can have on your long term financial well being, that's your choice. If you'd rather put the very powerful tool of dividend compounding at your disposal to help you build your net worth faster, then join us today at Motley Fool Income Investor.

At Income Investor, we've seen how dividend payments, received from and reinvested in great companies, can help your nest egg compound far more quickly. It's such a critical part of your long-run returns as an investor that we make those payments the centerpiece of our service. To learn more or see our scorecard with our top dividend paying picks, click here to start your 30 day free trial. There's no obligation.

At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. Automatic Data Processing and PepsiCo are Income Investor picks. The Fool owns shares of Medtronic and has a disclosure policy.