Dividends Key to Making Money in the Market

Over the past few weeks, we've been giving a lot of attention to the new records that the Dow JonesIndustrial Average and S&P 500 have reached. Really, they're nothing more than psychological levels that only indicate how much stock prices have moved since the last high. The indexes we quote every day don't tell us the whole picture of just how much stocks have returned to investors.

Dividends play a key role in any return a stock generates, and we should really consider dividends when looking at markets, as well. The chart below shows the returns of both the Dow and S&P 500 since the S&P's last record high on October 9, 2007. I've also included the total return indexes, which account for dividends paid by companies in each index.

^SPXTR Chart
^SPXTR Chart

^SPXTR data by YCharts

As you can see, there's a large gap in the returns of a total return index and the regular index. The Dow's gap between the dividend and non-dividend index is wider because its companies pay more in dividends than the S&P 500, which you can see has generated higher returns. Today, the SPDR Dow Jones Industrial Average ETF pays a 2.36% dividend yield, and the SPDR S&P 500 pays a 2.04% yield, so the gap continues.

Dividends matter
A regular dividend payment forces management to focus on cash flow instead of throwing money after growth projects. This can keep them more disciplined with investors' money, which generates higher returns.

The other reason dividends are so important to investors is that they usually come from established, more value-oriented companies, not high-flying growth stocks. On average, these value dividend stocks will beat out growth stocks long term, which is what Foolish investors should be focused on.

Dividends to buy today

If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.

The article Dividends Key to Making Money in the Market originally appeared on Fool.com.

Fool contributor Travis Hoium has no position in any stocks mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool has no position in any of the stocks mentioned. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.