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 Lancaster Colony
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Lancaster's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for competitors like Kraft
And how do Lancaster's dividends look? At 2.2%, its yield is slightly higher than the market average. The company has paid uninterrupted dividends since 1963, increasing that payout every year. Over the past five years, dividends have used up an average of 40% of free cash flow. That's a fairly conservative level that should protect is dividend from a slowing economy going forward.
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 Lancaster Colony to My Watchlist.
Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of H.J. Heinz. 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.