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:
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:
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.