Patience pays. That's the big wealth-creating secret of dividends: find a reliable cash machine with a history of increasing dividend payouts, then sit back and reinvest that sweet cash over many years or decades. How big a difference can these seemingly forgettable little return-boosters make? Have a look at some examples:
10-Year Return, Stock Only
10-Year Return With Reinvested Dividends
Telefonica (NYS: TEF)
Southern Company (NYS: SO)
Total (NYS: TOT)
Vodafone (NYS: VOD)
Texas Instruments (NYS: TXN)
Source: Yahoo! Finance.
Most of these dividend dynamos doubled their decade-long returns by reliable and increasing payouts. French oil producer Total more than tripled (assuming you did the smart thing and reinvested the spoils into more stock). It's dollar-cost averaging at its finest. It should come as no surprise that almost every stock on this list beat the Dow Jones Industrial Average (INDEX: ^DJI) index's meager 28% return over the same period, nor that the Dow's return would rise to 61% when accounting for dividend reinvestments.
Maybe the power of compounded dividend investing still hasn't hit home. Take a look at electric utility Southern Company, a mature business if there ever was one -- even 40 years ago. Let's say you invested $1,000 in that stock right out of college, in the summer of 1971.
On market gains alone, you'd now have $28,010 - a respectable 8.8% annualized return on your investment.
But with a strict dividend reinvestment strategy, the annual gains on Southern over the last four decades swells to 21.1%, and you're sitting on a cool $2.1 million. That's 75 times the straight stock return as Southern shoveled cash right into your pockets over four decades. That's a comfortable retirement, all from a single $1,000 investment and a very long investment horizon.
What about that little guy at the end?
The laggard in my table is obviously Texas Instruments. Nearly all of the last decade's returns from this chipmaker came from dividends, in spite of a dry spell with lousy single-digit payout increases over the last several years. The last double-digit annual increase was a 37% boost in 2008.
Well, TI wants to change all that. The company just announced a 31% dividend increase to $0.17 per share, per quarter. That gives investors a straight-up 2.4% annual yield.
This might surprise you if you paid attention to the gloomy mid-quarter update TI released last week. Management explained lower revenues with "broadly lower demand across a wide range of products, markets, and customers."
But quarterly guidance is fleeting and dividends are a long-term strategy. As CEO Rich Templeton and his team stated, "This dividend increase reflects the strength of our strategy, our confidence in our future, and our commitment to shareholders."
What does it mean?
That's a long-term vote of confidence, folks. Once you raise a dividend, cutting it back again would have disastrous consequences for investor confidence -- and for the stock price.
Look what happened when Bank of America (NYS: BAC) slashed its annual payouts from $2.56 a share to $0.04 per share in 2008. That was a symptom of a larger malaise, as are almost all explanations for dividend cuts. That stock is still down more than 80% from its pre-crash levels -- and fighting to reinstate a decent dividend policy.
So it would be foolhardy of Templeton to boost the dividend this much if he wasn't absolutely sure that it was a sustainable policy. He's basically telling us all to come and take advantage of this buy-in window, because these short-term issues shall pass.
Is Texas Instruments your new dividend hero? If not, there's plenty of high-paying fish in the sea:
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