Many investors rely on dividends for the income they need from their portfolios. But even if you don't need income right now, dividends represent a key part of your overall investment returns.
Dividends are especially important for the Dow Jones Industrials , with each of its 30 component companies making dividend payments to their shareholders. By comparing the changes in a stock's price with the total return that shareholders earn when you reinvest dividends, you can put a figure on just how important those dividends are. Let's look at the Dow stocks for which dividends made the biggest difference to investors.
5-Year Price Change Without Dividends
5-Year Total Return With Dividends
Source: S&P Capital IQ.
Nowhere is the benefit of dividends clearer than in the telecom sector, with Verizon topping the list and AT&T close behind. Given their high dividend yields, which come in at around 4% for Verizon and nearly 5% for AT&T, it's no surprise to see a big impact. But especially noteworthy is the fact that AT&T hasn't managed to see its share price advance at all since early 2008, yet the stock's payout has transformed what would have been a modest loss into a respectable average annual return of about 5%. For Verizon, which has been more successful in growing its business, dividends have more than doubled its total return from what its price change suggests.
Home Depot shows just how beneficial dividends can be for a stock that's performing well. With just over a 2% yield, the home-improvement retailer isn't known for its payouts. But thanks to strong performance in the light of gains in efficiency and a rebounding housing market, even those modest dividends were enough to add more than 40 percentage points to the stock's total return.
Meanwhile, big pharma stocks Merck and Pfizer show some of the same characteristics that you find in among the telecoms. Pfizer has done a better job than Merck of posting share-price gains even in the light of major patent expirations for both companies, yet both stocks have seen substantial portions of their total returns come from their solid dividend yields, both of which fall in the 3% to 4% range.
Count on dividends
Whether you invest in the Dow or elsewhere in the market, don't discount the value of dividends. Often, they'll be the most important factor in producing a positive return on your investment.
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The article What Makes Dow Dividends So Important originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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