The power of dividend reinvestment is beating the stock-market slump.
It's been a tough five years for shares, we hear the doomsters crying -- the FTSE 100 has gone nowhere, so investing in shares has been a waste of time and money.
But that's only concentrating on the headline share prices, which do not represent what you own if you've bought any of our top FTSE blue-chip shares. What you have is part of the company itself, and that entitles you to a share of its earnings as paid in the form of dividends.
And if you include dividends in the calculation, especially if you reinvest them in more shares each year, how much difference will that make to the headlines?
Wondering that, I took five shares in popular dividend-paying companies, whose share prices have performed variously, and totted up the dividends. I did two calculations, one assuming you simply kept the cash, and one to see what difference reinvesting would make.
Five popular dividends
I've started from share prices on 1st May 2007 and finished on 1st May 2012 and, to simplify things, I've assumed that each year's dividends were reinvested at the start of each May. I've also used 2012 dividend estimates in cases where they have not yet been declared.
Here's what I found:
|Company||Vodafone||Unilever||GlaxoSmithKline||British American Tobacco||Centrica|
|Share price 2007||158p||1,559p||1,310p||1,711p||383p|
|Share price 2012||172p||2,102p||1,424p||3,135p||317p|
|Share price change||+8.9%||+35%||+8.7%||+83%||-17%|
|Return, dividends retained||+37%||+54%||+31%||+109%||-1%|
|Return, dividends reinvested||+45%||+59%||+38%||+122%||+2.3%|
Three unexciting shares
Vodafone (LSE: VOD) frequently figures amongst Fool writers' favourite dividend-paying shares, but the headline share-price rise of 8.9% over five years is really pretty pathetic.
But if you'd stashed away the dividends in the piggy bank or spent them, you'd have had a total return of 37% over the five years. And even better, by reinvesting them you'd be up 45%.
Similarly with Unilever (LSE: ULVR) -- the manufacturer of so many household brands that it's almost impossible not to be a customer. People want to clean their teeth and disinfect the toilet just as much during hard times, and it shows.
Unilever's share price gained 35%, which is better but still not the thing mansions in the sun are bought from. But a 54% return including dividends, rising to 59% if they were reinvested, is bang in line for helping acquire that retirement cottage a few years earlier.
I chose GlaxoSmithKline (LSE: GSK), because it's had a bit of a volatile ride and some may be wary of its dependence on new developments within its labs. Accumulating dividends this time turned a poor 8.7% return into 31%, while reinvesting the cash bumped it up to 38%.
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A high flyer and a faller
British American Tobacco (LSE: BATS) has turned in one of the best FTSE share-price performances over the period, putting on a very impressive 83%. But it's done much better than the charts say, because dividends made that up to 109%, and reinvestment boosted it to a massive 121% return.
Centrica (LSE: CNA) is something an income seeker might choose, but which a chart-watcher might turn their nose up at after seeing its share price fall by 17% over the five-year period. Now that's bad news.
But at least your dividends would have compensated, turning that 17% loss into just a 1% loss overall, and even just creeping into positive territory with a 2.3% gain if the cash was reinvested. Of course, for income seekers, the Centrica five-year share price probably won't matter much, and the dividend has risen every year despite the share price falling. The forecast 2012 figure represents a 4.4% payout over the original 2007 share price, or 5.2% over the May 2012 price, so the cash is still coming in.
And the conclusion is...
The evidence seems clear to me -- dividends make up the bulk of portfolio gains in the long term, and reinvesting our payouts can boost the gains further.
And this is all over a five-year period that started in 2007 and almost at the peak of the credit boom, and then went through one of the worst slumps we've seen in recent decades. So just wait and see what the next bull run brings!
Finally, I confess I was at first a little disappointed to see that reinvesting dividends had only made a small difference in most cases, but then I reminded myself that in the early days you really are setting yourself up for the long term -- by May 2012, for example, you'd still only have about 1.3 shares for every Vodafone share you started out with.
So I extrapolated Vodafone forward, assuming a 4% rise in the dividend each year, which I think is a modest projection and easily achievable. And to be pessimistic I assumed no share-price rise.
After 10 years? Well, keeping and spending the dividends would see a total return of 85%, but if you reinvested all the way, you'd end up with a 120% gain. And that really is quite a difference!
Where is the UK's leading dividend stock-picker investing today? The identities of Neil Woodford's favourite blue chips are revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor".
Further investment opportunities:
> Alan does not own any shares mentioned in this article. The Motley Fool has recommended shares in Unilever.