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.
Today, I'll take a look at construction machinery veteran Caterpillar (CAT 1.58%). The stock is generally a good proxy for the global economy, given Caterpillar's deep ties with infrastructure and housing improvements. It does swing up and down with more gusto than the Dow Jones Industrial Average (^DJI 0.69%), which has counted Caterpillar as a member since 1991. In the long run, the volatility has worked out in Caterpillar's favor.
A generous dividend policy has poured gravy on top of Caterpillar's already impressive share price returns:
Caterpillar has more than tripled over the last decade -- or quadrupled if you faithfully bought more shares with every dividend check. That's a 40% increase in total returns, compared with a 16% dividend effect on the Dow as a whole.
Some dividend kings rest their shareholder value on rock-steady payout increases over the years. Caterpillar's story is a bit different.
Caterpillar took the crisis of 2008 and 2009 particularly hard, because construction activity ground to a halt on a global level. The stock lost 73% of its value between April 2008 and the bottom in March, 2009. But unlike the financial giants that stumbled on a similar scale, Caterpillar never slashed its dividends. You see, it's torrential cash flows never stopped gushing, even at the worst of times. Maintaining the dividend was a no-brainer.
So faithful shareholders ended up buying a lot of stock with their stable dividends. If you bought in at the right time, you could have locked in an effective yield of 7.2%.
It's not the traditional dividend story of rapid payout boosts, but rather one of unshakable cash-building power in the face of global disaster. There's nothing wrong with taking that alternative road to dividend riches.
