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How Dividends Change the Game for This Dow Stock

By Anders Bylund - Nov 6, 2012 at 2:00PM

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Compound returns and stocks that just don't die add up to massive long-term wealth.

The wealth-building power of compound interest will never cease to amaze me.

It's a story of patience and attention to detail, where small short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Let's look at a true blue-chip example. IBM ( IBM 1.66% ) has been a member of the Dow Jones Industrial Average ( ^DJI -0.17% ) index since 1932 and has paid uninterrupted dividends for the last 390 quarters (since 1913!). Look up "dependable" in a dictionary, and you might see IBM's striped logo as a definition.

The stock tends to live up to its blue-chip reputation. IBM investors have absolutely annihilated their Dow peers over the last 20 years:

IBM Chart

IBM data by YCharts.

And if you thought that chart was impressive, we haven't even considered IBM's dividends yet. Reinvesting those quarterly checks along the way would have provided another 28% boost:

IBM Chart

IBM data by YCharts.

That's a perfect illustration of how dividends pile up over time. IBM shares have gained an annual 13.1% on their own in those two decades, and the dividend-boosted compound annual return would be 14.5%. That 1.4% spread doesn't sound like much, but it makes a huge difference over time.

IBM's dividend yield sits at 1.8% today. Don't scoff at that seemingly insignificant number; it's well above the company's wealth-building long-term average and not far from the entry-level yields in our Income Investor portfolio. For example, spice and condiments stalwart McCormick ( MKC 1.76% ) yields 2%, while liquor powerhouse Diageo ( DEO -0.30% ) delivers a 2.2% annual payout. Both are longtime favorites of top income-building experts.

Patience times consistency equals big money, my friend. You can bank on it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,580.08 (-0.17%) $-59.71
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$118.84 (1.66%) $1.94
Diageo plc Stock Quote
Diageo plc
DEO
$204.63 (-0.30%) $0.61
McCormick & Company, Incorporated Stock Quote
McCormick & Company, Incorporated
MKC
$88.54 (1.76%) $1.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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