LONDON -- It's been a tough five years for shares, we hear the doomsters crying -- the FTSE 100
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 with share prices on May 1, 2007 and finished on May 1, 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||158 pence||1,559 pence||1,310 pence||1,711 pence||383 pence|
|Share Price, 2012||172 pence||2,102 pence||1,424 pence||3,135 pence||317 pence|
|Share Price Change||8.9%||35%||8.7%||83%||(17%)|
|Total Dividends||44.25 pence||303 pence||294 pence||442 pence||62.4 pence|
|Return, Dividends Retained||37%||54%||31%||109%||(1%)|
|Return, Dividends Reinvested||45%||59%||38%||122%||2.3%|
Three unexciting shares
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 those five years. And even better, by reinvesting them you'd be up 45%.
It's a similar story with Unilever
I chose GlaxoSmithKline
A highflier and a faller
British American Tobacco
Centrica is something an income-seeker might choose, but a chart-watcher might turn his or her 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 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 -- 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!
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Alan does not own any shares mentioned in this article. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline, Vodafone Group, and Unilever. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.