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 Cummins
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Cummins' share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for Caterpillar
And how do Cummins' dividends look? At 1.8%, its yield is about on par with the market average. The company has paid a dividend every year since 1991, quadrupling its payout since 2007. Dividends have used up an average of 20% of free cash flow over the past five years -- a low figure that should help Cummins continue making its payout for years to come, as well as leaving room for growth. "We have committed to delivering sustainable dividend growth," the company said on a recent conference call.
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.
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