Instead of telling you what you already know, that dividends create tremendous value over the long run, I'll simply lay out the numbers, which are more powerful. The true value of dividends can be explained via a simple math problem. Consider the two scenarios:
In Scenario 1, you own $10,000 worth of ABC, which produces a 6% annualized return over five years. After five years, the $10,000 grows to about $13,400.
In Scenario 2, you own $10,000 worth of XYZ, which produces a 6% annualized return over five years. XYZ also yields 3%, which you then subsequently invest back in XYZ. XYZ also increases its dividend by an average of 10% a year. At the end of five years, your investment is worth close to $16,000.
If you run these returns over 15 years, under Scenario 1, your capital grows to $24,000, and under Scenario 2, it grows to nearly $40,000. My numbers may be slightly off because of rounding, but the value of dividends is made glaringly clear in this example.Now let's add in today's real-world considerations: a zero-percent interest rate environment, inflation and what I would venture to guess will be a negative real rate of return in owning 10-year Treasuries that yield 1.8% today. Also, dividends are great when they can be counted on and don't come at the expense of a declining stock price. But there is also a secret about dividends that most of us know but few act upon: Dividends are real cash payments. You cannot manipulate cash flow like you can earnings per share. The market seemed to figure out the dividend thing with Wal-Mart (WMT - Get Report) back in May, and since then, shares are up nearly 50%. Consider that for the preceding 10-plus years, Wal-Mart shares had been flat, except for the annual dividend. Wal-Mart now yields a decent 2%, but for some time it was sitting there paying out more than 3% a year until investors came charging in. You may have missed out on Wal-Mart, but there are still some high yield dividends from quality blue-chip-like names that are set to offer respectable equity appreciation as well. The toy company Mattel (MAT - Get Report) currently yields 3.5%. The interesting thing about Mattel is that aside from the share-price volatility during the recession, shares just slowly grew over time. For the past decade, the company's average return on equity has exceeded 20%. Operating margins are in the high teens. Now for the best part: In 2002, the dividend payout was $0.05 a share; in 2011 Mattel was paying out $0.92 a share.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV