Tell me your all-time favorite NFL quarterback. (And yes, I promise this correlates to dividend investing.)
Is it Joe Montana? How about Fran Tarkenton? Perhaps Roger Staubach?
Either way, the topic inspires several heated debates across the web.[ad#Google Adsense 336×280-IA]Now, if I ask you to tell me your favorite NFL lineman, you can hear crickets chirping across cyberspace.
Because the high-profile players – like quarterbacks, running backs and wide receivers – usually get all the glory and attention.
Meanwhile, the mundane positions – like guards and tackles – get no respect or regard.
The same reality plays out in the investment world, too.
Most investors give all their attention to glamorous growth stocks, like Apple (AAPL) and Twitter (TWTR).
At the same time, they dismiss the unglamorous (yet powerful) world of dividend investing. Big mistake on both accounts. It’s time to prove it with two statistical illustrations…
Never Ignore the Unsung Hero
It’s fall, which means sports writers are out in full force explaining why particular football teams won or lost over the weekend.
The majority of their analyses center on the performance of one or two high-visibility players, usually quarterbacks and wide receivers. They always do.
Now, I’m not about to say high-profile positions don’t matter in football. However, the data shows that the unsung heroes of the trenches are just as important to success on the gridiron.
Case in point: the Defense-Adjusted Value Over Average (DVOA), which measures the efficiency of the offensive line in a football game.
Did you know that in each of the last 17 years, the team that won the Super Bowl had a DVOA score that was at least 15 percentage points higher than its opponent?
Of course you didn’t! Last year, Joe Flacco, the Baltimore Ravens’ quarterback, got all the praise.
And nobody paid much attention to Matt Birk (center) or Kelechi Osemele (right tackle).
Even if we go back nearly 50 years, the importance of unglamorous offensive linemen in Super Bowl success holds true – as the winning team boasted a higher DVOA 89.9% of the time.
The takeaway? NFL teams with higher DVOAs win at significantly higher rates than teams with lower values. So if you want to pick the next Super Bowl winner, forget the quarterback and focus on teams with the best offensive linemen.
What Does This Have to Do With Dividend Investing? Everything!
I’m sure we can all agree that the investment equivalent of winning the Super Bowl is one of two things…
Retiring way early or retiring with more money than we ever imagined possible because me made such smart investments.
Well, guess what? To do either, you can’t simply focus on growth stocks. Nor can you simply focus on high-quality dividend stocks.
To truly multiply our wealth and retire early (or with abundance), it’s imperative that we focus on reinvesting dividends.
I know. The mere mention of reinvesting dividends invokes endless yawns. But wealth building doesn’t require excitement. Downright boring happens to be downright profitable, as well. Just like the DVOA in football, the math bears this reality out for investors.
Consider: Over the last 10 years, the 30 dividend-paying stocks in the Dow Jones Industrial Average (DJIA) returned a respectable 59.4%. However, an investor that reinvested all of his dividend payments would have nearly doubled his profits, enjoying a return of 105.5% over the same period, according to Jared Cummans at Dividend.com.
Lest you think this is a phenomenon isolated to the DJIA, think again.
Based on an analysis published in September (see here) by Aye M. Soe, Director of Index Research and Design at S&P Dow Jones Indices, an investor in the S&P 500 Index would have enjoyed a 114.6% return over the last 10 years. While an investor who reinvested their dividends would have enjoyed a 200.3% return.
It goes without saying that the longer a person reinvests dividends, the more dramatic this outperformance gets.
Now this usually required investing directly with companies that offered Dividend Reinvestment Plans (DRIPs), which can be a bit of a hassle. But now online brokerages like Scottrade offer the option to automatically reinvest dividends.
Bottom line: Not only is dividend reinvesting the superior way to build wealth. It’s also easier to do than ever before. So what are you waiting for?
We’ll keep serving up the compelling dividend stocks. You keep reinvesting the dividends. And before you know it, you’ll be retiring early.
And consider the ability to consistently pick Super Bowl winners an added bonus to reading our material. You’re welcome.
Source: Dividends and Income Daily