The late John Bogle, an investment legend who launched The Vanguard Group and created the concept of an index fund, once shared his research on the single most important factor for long-term investing.
“Over the past 81 years, reinvested dividend income accounted for approximately 95% of the compound long-term return earned by the companies in the S&P 500,” he said. In other words, the payout from companies reinvested in the broader stock market accounted for nearly the entire total return of the world’s best-performing index.
Further research from the Wall Street Journal and Wharton Business School confirmed this phenomenon. It seems obvious, then, to focus primarily on high-yield dividend stocks and companies with dividend-reinvestment plans.
At the moment, the TSX 60 index, which holds the top 60 listed companies, offers an average dividend yield of 3%. Meanwhile, the earnings yield of the TSX 60 index is 6.3%, which means the payout ratio is nearly 47.6%. Reinvesting dividends from this benchmark index over the long term should lead to decent performance, but here are two stocks with lower payout ratios and higher dividend yields that could boost your returns further.
Manulife Financial
Insurance giant Manulife Financial (TSX: MFC)(NYSE: MFC) is probably one of the most underrated financial stocks in the country, in my opinion. While the rest of the financial industry is either too risky or too overvalued, Manulife keeps chugging along, creating value for shareholders and keeping a firm grip on the balance sheet.
At the moment, the management pays out only 41% of earnings in dividends. The dividend yield is 3.8%, which is roughly 26% higher than the average stock on the TSX 60.
Manulife’s exposure to Asia is what makes this financial stock particularly compelling. Nearly 80% of its growth in recent years has been driven by sales in Asia. As exposure to this region expands, Manulife’s stock will be less correlated with the North American business and credit cycle.
In other words, it’s a great stock for investors seeking a low-risk, steady return.
Canada Natural Resources
Despite the 20% surge in share price over the past three months, Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ) is still conveniently priced. The stock is an obvious victim of the pessimism looming over the oil and gas industry. It’s currently trading at just 12.4 times annual earnings.
Meanwhile, the dividend-payout ratio is a modest 43%, and the dividend yield is 3.6%.
My Fool colleague Karen Thomas took a look under the hood and found that the company was firing on all cylinders. Cash flow is steadily rising, while the debt burden (at just 70% of equity) isn’t much of a concern.
As the sentiment about Canada’s energy sector starts to shift in the years ahead, investors can expect CNQ’s stock valuation to revert back to its long-term average. Analysts have set their price target at $45.2 over the next 12 months, which would imply an upside of roughly 8% from the current market price.
Combine that with the 3.6% dividend yield and the 19-year history of dividend growth, and you can see why Canadian Natural Resources is such an underappreciated gem.
Bottom line
Reinvested dividends have accounted for 95% of total stock returns over time. Manulife and Canadian Natural Resources offer higher dividend yields and lower payout ratios than average, which could further enhance your dividend-reinvestment strategy.
