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 Atmos Energy (NYS: ATO) , for example. Since the mid-1980s, the company's share price has increased 384%. But add in reinvested dividends, and total returns jump to more than 1,800%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Atmos's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for other utilities like Consolidated Edison (NYS: ED) and Southern Company (NYS: SO) ; 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 Atmos' dividends look? At 4.4%, its yield is far above the market average. The company recently paid its 111th uninterrupted dividend payment -- a truly phenomenal record. Dividends often use up more than is generated in free cash flow, but this isn't particularly troubling in the energy and utility industry, where high capital expenditures are rewarded with fairly stable returns. Atmos should continue delivering above-average returns for years to come.
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 Atmos to My Watchlist.
At the time thisarticle was published Fool contributor Morgan Housel owns shares of Edison and Southern Company. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Southern. 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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