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 Rockwell Automation (NYS: ROK) , for example. Since the late 1960s, the company's share price has increased 1,050%. But add in reinvested dividends, and total returns jump to 13,100%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Rockwell Automation's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar to others in the industrial component space, such as Emerson Electric (NYS: EMR) and Honeywell (NYS: HON) ; 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 Rockwell's dividends look? At 3.2%, its yield considerably exceeds the market average. It's paid a dividend every year since 1992. Over the past five years, dividends have used up an average of 50% of free cash flow. That's a fairly conservative figure that helps guard against any possible dividend cuts for the foreseeable 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 Rockwell Automation 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.Motley Fool newsletter services have recommended buying shares of Emerson Electric. 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.