How Dividends Change the Game for This Dow Stock


The wealth-building power of compound interest will never cease to amaze me.

It's a story of patience and attention to detail, where small short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Let's look at a true blue-chip example. IBM (NYS: IBM) has been a member of the Dow Jones Industrial Average (INDEX: ^DJI) index since 1932 and has paid uninterrupted dividends for the last 390 quarters (since 1913!). Look up "dependable" in a dictionary, and you might see IBM's striped logo as a definition.

The stock tends to live up to its blue-chip reputation. IBM investors have absolutely annihilated their Dow peers over the last 20 years:

IBM Chart
IBM Chart

IBM data by YCharts.

And if you thought that chart was impressive, we haven't even considered IBM's dividends yet. Reinvesting those quarterly checks along the way would have provided another 28% boost:

IBM Chart
IBM Chart

IBM data by YCharts.

That's a perfect illustration of how dividends pile up over time. IBM shares have gained an annual 13.1% on their own in those two decades, and the dividend-boosted compound annual return would be 14.5%. That 1.4% spread doesn't sound like much, but it makes a huge difference over time.

IBM's dividend yield sits at 1.8% today. Don't scoff at that seemingly insignificant number; it's well above the company's wealth-building long-term average and not far from the entry-level yields in our Income Investor portfolio. For example, spice and condiments stalwart McCormick (NYS: MKC) yields 2%, while liquor powerhouse Diageo (NYS: DEO) delivers a 2.2% annual payout. Both are longtime favorites of top income-building experts.

Patience times consistency equals big money, my friend. You can bank on it.

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Fool contributor Anders Bylund has no positions in the stocks mentioned above. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Diageo, International Business Machines, and McCormick & Company. 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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