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 Dominion Resources (NYS: D) , for example. Since the mid-1980s, the company's share price has increased 587%. But add in reinvested dividends, and total returns jump to over 3,500%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Dominion's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for American Electric Power (NYS: AEP) and NextEra (NYS: NEE) ; 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 Dominion's dividends look? At 3.9%, its yield is well above the market average. The company has paid a dividend every year since at least 1983. Dividends often use up more than Dominion generates in free cash flow, but this is common in the utility space, where high capital expenditures are rewarded with fairly stable earnings. I've tracked dozens of dividend-adjusted utility stocks' returns lately, and to my surprise, most outperform broad market averages over time with far less volatility. Dominion is indeed one of those companies, making it a great candidate for a strong investment in a slowing economy.
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 Dominion Resources 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 Fool has written puts on NextEra Energy. Motley Fool newsletter services have recommended buying shares of Dominion Resources. 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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