What a Difference a Dividend Can Makehttp://www.fool.com/investing/general/2013/12/02/what-a-difference-a-dividend-can-make.aspx Philip Saglimbeni
December 2, 2013
For most investors, dividend investing is considered a boring alternative to pure growth investing. However, this in no way means it is not a successful practice. In fact, when combined with growth investing, a simple dividend can become an incredibly powerful weapon.
The dividend difference
Let's look at a few examples of dividend reinvestment in companies that have proven to be extremely strong dividend achievers over the years: W.W. Grainger (NYSE: GWW), Nike (NYSE: NKE) and VF Corporation (NYSE: VFC):
Numbers courtesy of YCharts.com
In the table above, the "5-Year Return" is simply share appreciation while the "Total 5-Year Return" is share appreciation plus dividends reinvested. Notice the greater investor return when all dividends are reinvested.
In the case of Grainger, an investor netted an extra 34.2% over the course of five years simply by reinvesting all dividends paid by the company. In the second example, an investor gained an extra 26.5% by reinvesting all dividends paid by Nike. Finally, just by reinvesting all dividends paid by VF Corp over the last five years, investors gained an additional 72.8%.
VF Corp has traditionally had the highest dividend yield over the last five years, which accounts for the company's drastic outperformance in total returns. However, the results are certainly impressive for all three companies.
How it works
Also, with specific regard to companies that grow dividends consistently, the dividend growth rate also has a compounding effect on total return as it continues to build off of growth in all prior years.