LONDON -- Some of the largest companies in the FTSE 100 (UKX) run schemes where investors can take dividends in the form of shares instead of cash. In a Dividend Reinvestment Plan (DRIP), shares are bought with the dividend cash. In a scrip scheme, new shares are issued in lieu of payment.
If a company with a DRIP/scrip scheme pays a large and increasing dividend, such reinvestment can quickly compound the size of your shareholding upwards.
Previously incorporated as two separate companies (Royal Dutch Petroleum and Shell Transport & Trading), Royal Dutch Shell was formed from a merger of the two in 2005.
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My figures are based on a shareholder who bought 1,000 Shell shares in 2006. Shell's scrip dividend plan began in Q3 2010. For the previous years, I've used historic data to indicate how a dividend reinvestor could have accumulated Shell stock.
With dividends reinvested in Shell shares, those 1,000 shares bought in 2006 at 1,954 pence would have grown to 1,362 shares today.
If an investor was prepared to forego income, then an outlay of 19,540 pounds on the shares just over six years ago would be worth 29,964 pounds today.
Shell has been steadily increasing its dividend in those six years. The full payout for 2006 was $1.27 per share. For this full year, dividends are expected to total $1.76 per share. That's a 38.6% increase.
With an expected yield for 2013 of 5.1%, 19,540 pounds invested in Shell six years ago (and reinvested) now brings an expected income of 1,528 pounds per annum.
Few shares demonstrate a company's ability to pay its shareholders better than Shell. In 2011, the Capita Dividend Monitor report confirmed that Shell paid out more cash to its shareholders than any other FTSE 100 company. In fact, the total payout from Shell is 1/8th of the aggregate payout from the entire FTSE 100.
Shell dividend reinvestors have capitalised on periods when the share price fell by accumulating shares cheaply. The company is a great example of the power of dividend reinvestment.
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David does not own shares in Royal Dutch Shell or any other company mentioned. 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.