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 it's even greater. Take ConocoPhillips (NYS: COP) , for example. Since the late 1960s, Conoco's share price has increased 2,300%. But add in reinvested dividends, and total returns jump to nearly 11,000%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Conoco's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for competitors BP (NYS: BP) and ExxonMobil (NYS: XOM) ; 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 to those dividend payouts, and your commitment to reinvest them.
And how do Conoco's dividends look? The recent market pullback pushed its yield up to nearly 4%. That's well above the market average, and superior to most competitors. Conoco and its predecessors have paid a dividend every year since 1934. Excluding 2009, when earnings fell off a cliff as oil prices collapsed, dividends have used up an average of 50% of Conoco's free cash flow over the past five years. Management has remained steadfast in its commitment to dividends, and investors should expect consistent payouts for the indefinite 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.
Add ConocoPhillips to My Watchlist.
At the time thisarticle was published Fool contributorMorgan Houselowns shares of ExxonMobil. 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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