5 Dividends To Reinvest

Published in Investing on 14 May 2012

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:

CompanyVodafoneUnileverGlaxoSmithKlineBritish American TobaccoCentrica
Share price 2007158p1,559p1,310p1,711p383p
Share price 2012172p2,102p1,424p3,135p317p
Share price change+8.9%+35%+8.7%+83%-17%
Total dividends44.25p303p294p442p62.4p
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.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 14 May 2012 , 9:54pm

Anyone serious about investing for dividendx eventually realises that whatever may happen to the paper price of his portfolio, it suits his book foe Footsie to crawl along the bottom of the index.

dubre 15 May 2012 , 11:26am

Just by coincidence I was filing returns for a share purchased in 2001(minimum effort here) when this article appeared.

Never mind dividend reinvestment,it does no harm to remind ourselves of the importance of dividend streams.This particular share has returned 20% more than the original purchase price & is yielding 17.5% net on that price.

The 600% gain on share price is purely notional until sold.

It does beg the question.Should I sell now when it is yielding 2.8%net?

equitybore 15 May 2012 , 12:05pm

A useful tip is the rule of compound interest - divide 72 by the dividend yield and you will get the doubling of value - more if you re-invest. So Shell (around 6% dividend yield) will double every 12 years regardless of underlying capital value.

equitybore 15 May 2012 , 12:08pm

Oops - should of course said that the Shell example can be increased if you re-invest in a higher dividend yield...

Nathan75 15 May 2012 , 12:42pm

With regards to Centrica,

Does this take into account the 2008 rights issue which diluted the overall share price? Shares were offered 3 for 8 at a 40% discount, I seem to remember.

eccyman 15 May 2012 , 1:02pm

The divide by 72 rule is pretty close. ie a return of 10% will double in 7 years.

The maths is quite interesting. The half of the square root of 2 when expressed as a percentage is 72!

4spiel 15 May 2012 , 3:51pm

The value in a share is rather in the eye of the beholder -it is an art rather than a science.The price is important as is the dividend but the value is in the perception of the company -what it does-and its future standing..

psatek 15 May 2012 , 4:52pm

The rule of 72 actually comes from the natural logarithm of 2.

TMFBoing 15 May 2012 , 5:10pm

Does this take into account the 2008 rights issue which diluted the overall share price? Shares were offered 3 for 8 at a 40% discount, I seem to remember.

Yep, the source I used was adjusted for rights/splits etc.

Foolish best,
Alan
TMFBoing

snoekie 15 May 2012 , 7:08pm

Ah well, 4 out of 5 is not bad........

goodlifer 15 May 2012 , 8:48pm

Many thanks, psatek
"The rule of 72 actually comes from the natural logarithm of 2."

We live and learn - I never realised that, but it's obvious. when you think about it

It follows that the time to treble follows the rule of 110.

ANuvver 16 May 2012 , 10:19am

There's also a "rule of 69" for compound doubling - which is more accurate over a broader range. 72 is easier as a rule of thumb though, since it factors in such a friendly fashion.

peep1253 17 May 2012 , 10:11am

Not as good as you make out .
45% and 38% over 5 years.

5 year ISA 4.5% gets you about 29%.

So for taking a risk on stockmarket you get an extra 16% and 9% over 5 years
Which is about 2.5% and 1.75% cumulative per year.extra for risk.

Would I invest in the market for an extra 1.75% pa.taxable rather than the non taxable Isa's?
No!

TMFBoing 17 May 2012 , 5:59pm

So for taking a risk on stockmarket you get an extra 16% and 9% over 5 years

But that's the way it's turned out over one of the worst 5-year periods for shares in recent memory. If that's the worst you're likely to do, I think that only strengthens the case for shares.

Foolish best,
Alan
TMFBoing

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