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 Sara Lee (NYS: SLE) for example. Since the late 1960s, Sara Lee's share price has increased 1,600%. But add in reinvested dividends, and total returns jump to 9,400%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Sara Lee's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for other food companies like General Mills (NYS: GIS) and Kraft (NYS: KFT) ; 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 Sara Lee's dividends look? At 2.7%, its yield is moderately higher than the market average. Dividends have been paid every quarter since 1946 -- that's 261 consecutive payouts. The company is in the process of splitting into two, with a special one-time $3 per-share dividend as part of the split. Post-split, the two independent companies should retain their previous dividend capabilities, with management projecting both will enjoy "a competitive dividend yield."
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 Sara Lee 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.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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