The Importance of Dividends

We read in Kiplinger's Personal Finance that historically, approximately 65% of the return on stocks has come from the compounding of reinvested dividends. Beyond the numbers, dividends are the most revealing indicator of a company's success - even better than earnings per share or return on equity.

Companies that raise their dividends consistently tend to outperform the market as a whole. Such companies seem to have found a stable, profitable market niche; a moat, or defensive perimeter around their business that discourages competitors.

With this fact in mind, it is well to note that the average payout ratio among S&P 500 companies is now 32%, which is far below the long-term norm of 50%. Therefore it would appear that there is plenty of "wiggle room" for dividend increases that would raise the future value of these stocks.

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