The Extraordinary Power of Dividends: Edison International Edition
I took my first investing class as a teenager, and one moment stands out in my memory. A fellow student asked the instructor, a stockbroker, about dividends.
"Dividends?" he asked. "I'm trying to make my clients wealthy. You don't do that waiting for tiny checks in the mailbox every quarter."
Even then, I had enough horse sense to know he was wrong. Paying attention to dividends is exactly how you become wealthy over time.
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 it's even greater. Take Edison International (NYS: EIX) for example. Since the late 1960s, Edison International's share price has increased 316%. But add in reinvested dividends, and total returns jump to nearly 5,000%:
Source: Capital IQ, a division of Standard & Poor's.
There's no ambiguity here: Over time, Edison International's share appreciation alone has paled in importance to the power of its reinvested dividends. The results are similar for other utility companies like FirstEnergy (NYS: FE) and PG&E (NYS: PCG) ; Reinvested dividends skew both companies' total long-term 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 Edison International's dividends look? The company has paid a dividend every quarter since 1910, save for a three-year hiatus in the early 2000s amid California's energy crisis -- a crisis many blame on Enron. At 3.4%, its yield is far above the market average, but slightly below that of other utility companies. Dividends use up essentially all -- if not more than all -- of the company's free cash flow, but this is fairly standard in the utility industry, where heavy capital investments generate fairly stable and consistent returns. Edison International should produce solid dividend results 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.
At the time this article was published Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.
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