I took my first investing class as a teenager, and one moment stands out in my memory. A fellow student asked the instructor, a stockbroker, about dividends.
"Dividends?" he asked. "I'm trying to make my clients wealthy. You don't do that waiting for tiny checks in the mailbox every quarter."
Even then, I had enough horse sense to know he was wrong. Paying attention to dividends is exactly how you become wealthy over time.
Wharton professor Jeremy Siegel made a wonderful discovery in his book The Future for Investors. The greatest long-term returns typically don't come from the most innovative companies, or even companies with the highest earnings growth. They come from companies that happen to crank out dividends year after year. Simply put, since the 1950s, "the portfolios with higher dividend yields offered investors higher returns."
Market commentary regularly centers around price gyrations, yet dividends have historically accounted for more than half of total returns.
Reinvest those dividends, and your results become even greater. Take, for example, Southern Co.
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Southern's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for competitors American Electric Power
And how do Southern's dividends look? The company has paid a dividend every year since at least 1987. Its current yield -- 4.9% -- is far above the market average, but fairly standard for the utility sector. Dividends have historically eaten up all, if not more than all, of free cash flow, as management has invested heavily in infrastructure while keeping a commitment to shareholder returns. While this could eventually put pressure on payout growth, Southern should generate above-average dividends for years to come.
To earn the greatest returns, get your priorities straight. What the market does is less important than what your company earns. What your company earns is less important than how much it pays out in dividends. And what it pays out in dividends is less important than whether you reinvest those dividends.
- Add Southern Co. to My Watchlist.
Fool contributor Morgan Housel owns shares of Southern. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Southern. 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.