The Extraordinary Power of Dividends: Public Storage 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 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 Public Storage (NYS: PSA) , for example. Since the early 1980s, the company's share price has increased 723%. But add in reinvested dividends, and its total returns jump to more than 4,600%:

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Source: Capital IQ, a division of Standard & Poor's.

There's no ambiguity here: Over time, Public Storage's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for competitors Sovran Self Storage (NYS: SSS) and Extra Space Storage (NYS: EXR) ; reinvested dividends skew both companies' total 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 Public Storage's dividends look? Its current yield, 3.2%, considerably exceeds the market average. As a REIT, Public Storage is required to pay out most of its earnings to shareholders as dividends. That requirement can create payout volatility at some REITs, but Public Storage has a remarkably stable history. It's paid dividends every quarter since 1981, and those payouts have grown at an average of 14% per year for the past 10 years.

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 Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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