Between 1950 and 2003 IBM’s stock increased 300% while Standard Oil of New Jersey (now Exxon Mobile) grew 120%. It’s easy to assume from these brief statistics that IBM was the more profitable investment; however, that would be incorrect. Due to dividends, shareholders of Standard Oil would have accumulated a $1.26 million portfolio while IBM shareholders would have $961,000.
During Base Camp, all of Skyline's clients are informed that value stocks beat growth stocks 95% of the time over any 15-year period. (From 1926 to 2016 value stocks averaged 17% annual returns, while growth stocks averaged 12.6%.) As a rule of thumb, value companies have undervalued stock, i.e. a low P/E ratio, and pay out more of their earnings in the form of dividends. Growth companies tend to reinvest retained earnings due to a need for rapid expansion. Although growth stocks experience faster price increases (therefore attracting much media attention), shareholders receive little, if any, dividends.
The power of dividends lies within the compounding effects of reinvestment; dividends that are reinvested to buy more shares will produce more dividends, and the cycle continues multiplying returns ad infinitum. Over a 20-year period reinvested dividends from the S&P 500 resulted in a 321% gain; without dividend reinvestment that gain was only 190%.