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 RPM International (NYS: RPM) , for example. Since the early 1980s, the company's share price has increased 785%. But add in reinvested dividends, and total returns jump to over 2,300%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, RPM's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for others in the chemical space, such as DuPont (NYS: DD) and Eastman Chemical (NYS: EMN) ; 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 to those dividend payouts and your commitment to reinvest them.
And how do RPM's dividends look? At 4.1%, its yield is far above the market average. It's paid a dividend since 1969, and raised that payout every year for the past 37 years. The company isn't shy about its record: "Only 49 of the 19,000 U.S. public companies have consecutively paid an increasing annual dividend for this period of time or longer," its website boasts. Over the past five years, dividends have used up an average of 60% of free cash flow. While not low, that's a fairly safe figure that should allow RPM to continue its history as a dividend dynamo well into the 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 RPM 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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