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 your results become even greater. Take Kimberly-Clark (NYS: KMB) , for example. Since the late 1960s, Kimberly-Clark's share price has risen 3,600%. But add in reinvested dividends, and total returns jump to 17,400%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Kimberly-Clark's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for other consumer companies such as Colgate-Palmolive (NYS: CL) and Procter & Gamble (NYS: PG) . 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 Kimberly-Clark's dividends look? Its current yield, 4.1%, is well above the market average. The company has paid a dividend every year since at least 1972, raising its payout every year by an average of 10%. Over the past five years, dividends have used up an average of 60% of the company's free cash flow, which should provide a cushion against any impending cuts, as well as room for future growth.
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.
Add Kimberly-Clark to My Watchlist.
At the time thisarticle was published Fool contributorMorgan Houselowns shares of Procter & Gamble. Follow him on Twitter at @TMFHousel.Check out hisholdings and a short bio.Motley Fool newsletter services have recommended buying shares of Kimberly-Clark and Procter & Gamble. 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.