Advertisement
Australia markets closed
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • AUD/USD

    0.6495
    -0.0040 (-0.62%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • OIL

    82.10
    +0.75 (+0.92%)
     
  • GOLD

    2,228.60
    +15.90 (+0.72%)
     
  • Bitcoin AUD

    108,593.71
    +713.29 (+0.66%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     

Op-Ed: She bought just 3 shares and became a multimillionaire

Sefa Karacan | Anadolu Agency | Getty Images

Grace Groner started her career as a secretary at Abbott Laboratories more than 80 years ago. Four years into her job, she purchased three shares of our company stock for just under $200. She held on to those three shares until she died, in 2010.

Those three shares alone made her a multimillionaire. She could thank the company dividend — and the miracle of compounding — for her $7 million fortune.

Grace wasn't abnormally lucky. Any investor who bought $1,000 worth of high-dividend-paying stock 75 years ago would have about $3 million today.

Yet the latest conventional wisdom on Wall Street pegs dividend-paying stocks as overvalued.

ADVERTISEMENT

That "wisdom" is wrong. Ordinary investors and Wall Street gurus alike have long favored dividend-paying stocks for their steady returns. For most Americans, they remain among the surest paths to wealth.

Most large companies share their profits with stockholders by paying a cash "dividend," typically once every three months. Dividends range from a few pennies to a dollar or more for every share. Shareholders can pocket this cash or reinvest it to buy more of the company's stock. If they choose the latter, they'll own more shares and thus earn even more in dividends down the road.

Reinvesting essentially creates a snowball effect. As the years roll on, a small investment can yield a huge return. In fact, from 1930 to 2012, dividends accounted for nearly 42 percent of the total return of the S&P 500 (^GSPC) stock market index, according to a Morgan Stanley study.

Dividend stocks are typically far less risky than those with no payout. After all, it takes discipline, stability and a healthy outlook for the future to maintain those regular payments.

More from Investor Toolkit:
Consider life insurance sooner rather than later
Key steps millennials can take for financial security
Should you join the stampede toward passive investments?

A recent study proves as much. Between 1972 and 2011, 42 percent of non-dividend-paying firms lost money at least one year, compared to only 6 percent of dividend-paying firms, wrote researchers Yufen Fu of Tunghai University and George Blazenko of Simon Fraser University in their 2015 report "Returns for Dividend-Paying and No-Dividend-Paying Firms," published in The International Journal of Business and Finance Research.

The steady stream of income that dividend stocks offer is particularly valuable for retirees. With life expectancy increasing, many worry about running out of savings and having to sell off assets to supplement Social Security. Dividend payouts can help ward off such a scenario.

That's been the case for one man who bought 10 shares of Pfizer for $350 in 1960. As documented by the investing website The Motley Fool, he continued to reinvest his dividends until he owned 9,100 shares. Now that he's retired, he takes the cash payout of $10,500 each year. That's more than half the average Social Security check. And he doesn't have to sell a single share to get that money — so he won't deplete his holdings.

Also, consider that many investors expect the Federal Reserve to raise interest rates before the end of the year. That could cool investor enthusiasm for stocks and thus lead to lower prices.

Yet stocks of companies that continually raise dividends historically outperform their peers when interest rates rise, according to a report from money manager BlackRock.

Some other investors fear that the stock market's seven-year bull market may soon come to an end. If they're right, stocks that pay high dividends offer the best refuge. During its 15 worst months, the S&P 500 index declined about 7.6 percent. By contrast, the S&P 500 Dividend Aristocrats Index, which is comprised of companies that have increased their annual dividends for at least 25 consecutive years, dropped only 5.8 percent. (Editor's note: Abbott Laboratories is ranked in the S&P 500 Dividend Aristocrats Index.)

Indeed, as the BlackRock report notes, dividend stocks "perform well in bull markets and historically have provided greater protection in bear markets."

Dividend-paying stocks offer investors high returns, peace of mind and an extra payment a few times a year. They remain the most reliable way to get rich — slowly but surely.

— By Miles D. White, chairman and CEO of Abbott Laboratories





More From CNBC

  • Top News and Analysis

  • Latest News Video

  • Personal Finance