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 the gains get even greater. Take OGE Energy
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, OGE's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for others like Williams
And how do OGE's dividends look? At 3%, its yield is well above average. The company has paid a dividend since 1908. Dividends often use up more than OGE generates in free cash flow, but this isn't particularly troubling or rare in the energy and utility industry, where high capital expenditures are rewarded with fairly stable returns. Over the past five years, dividends have used up roughly 50% of net income. That figure coupled with a long-term track record of consistent dividends bodes well for a future of above-average returns.
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 OGE Energy to My Watchlist.
Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. 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.