The Extraordinary Power of Dividends: Target Edition

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I took my first investing class as a teenager, and one moment stands out in my memory. A fellow student asked the instructor, a stockbroker, about dividends.

"Dividends?" he asked. "I'm trying to make my clients wealthy. You don't do that waiting for tiny checks in the mailbox every quarter."

Even then, I had enough horse sense to know he was wrong. Paying attention to dividends is exactly how you become wealthy over time.

Wharton professor Jeremy Siegel shared 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 on price gyrations, yet dividends have historically accounted for more than half of total returns.

Reinvest those dividends, and it's even greater. Take Target (NYS: TGT) , for example. Since the late 1960s, Target's share price has increased 6,600%. But add in reinvested dividends, and total returns jump to more than 16,000%.

  

There's no ambiguity here: Over time, Target's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for other big retailers like Wal-Mart (NYS: WMT) and JC Penney (NYS: JCP) ; Reinvested dividends skew both companies' total long-term returns dramatically higher. If you're a long-term shareholder, don't worry about daily share wobbles. Devote your attention those dividend payouts and your commitment to reinvest them.

And how do Target's dividends look? The company has paid a dividend every year since 1965, increasing payouts every year for the past 44 years. Its current yield -- 2.5% -- is about on par with the market average. Dividends use up a very small portion of annual free cash flow, so there's little reason to think Target's payout is in danger of being cut in the foreseeable future.

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.

At the time this article was published Fool contributorMorgan Houselowns shares of Wal-Mart. Follow him on Twitter, where he goes by@TMFHousel.The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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