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 Progress Energy (NYS: PGN) for example. Since the late 1960s, Progress Energy's share price has increased 122%. But add in reinvested dividends, and total returns jump to nearly 4,000%:
Source: Capital IQ, a division of Standard & Poor's
There's no ambiguity here: Over time, Progress Energy's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for other utilities like Duke Energy (NYS: DUK) and NextEra Energy (NYS: NEE) ; Reinvested dividends skew both companies' total long-term returns dramatically higher. Interestingly, even as a bland utility, Progress Energy's total long-term returns are about on par with market averages, but it achieved those returns with significantly less volatility. Why? Big dividends. 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 Progress Energy's dividends look? At 5.4%, its current yield is not only well above market averages, but above that of many competitors. The company has paid a dividend since at least 1990, either raising or maintaining its payout every year. Dividends use up the majority of Progress Energy's free cash flow -- if not more. This, though, is standard in the utility sector, where large capital investments are rewarded with fairly stable revenues. Progress Energy's track record of consistent dividends bodes well for its future as a dividend dynamo.
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 Progress Energy to My Watchlist
At the time thisarticle was published Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.The Fool owns shares of and has written puts on NextEra Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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