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 American States Water (NYS: AWR) , for example. Since the mid-1980s, the company's share price has increased 333%. But add in reinvested dividends, and total returns jump to over 1,500%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, American States Water's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for others like American Water Works (NYS: AWK) and California Water Service (NYS: CWT) ; 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 American States Water's dividends look? At 3.4%, its yield is well above the market average. The company has paid a dividend every year since 1931, increasing payouts annually since 1953 -- a truly stellar record. "We're one of the few companies with a record like that and we take that very seriously," management said in a conference call last year. Over the past five years, dividends have used up an average of 62% of net income -- a reasonable level for a utility company. American States Water should continue producing 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 American States Water to My Watchlist.
At the time thisarticle was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of California Water Service Group. Motley Fool newsletter services have recommended buying shares of California Water Service Group. 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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