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Is Vodafone a DRIP Share for the Long Term?

By David O’Hara - Updated Apr 7, 2017 at 11:37AM

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How have investors fared reinvesting their dividends from Vodafone?

LONDON -- Some of the largest companies in the FTSE 100 run schemes where investors can take dividends in the form of new shares instead of cash. These schemes are often called Dividend Reinvestment Plans and distribute what are known as "scrip" dividends.

If a company with a DRIP scheme pays a large and increasing dividend, such reinvestment can quickly compound the size of your shareholding upwards.

Using dividend data from Vodafone (LSE: VOD.L) (Nasdaq: VOD), you can see how the income produced by company has made dedicated shareholders richer.

My figures are based on a shareholder that bought 1,000 Vodafone shares 10 years ago. Here's how dividend reinvestment has rewarded Vodafone's investors:

Shares Owned

Dividend

Dividend per Share (pence)

Shares Purchased by DRIP Scheme

New Holding

1,000

2002 interim

0.72

4

1,004

1,004

2002 final

0.75

7

1,011

1,011

2003 interim

0.79

7

1,018

1,018

2003 final

0.90

7

1,025

1,025

2004 interim

0.95

7

1,032

1,032

2004 final

1.08

9

1,041

1,041

2005 interim

1.91

14

1,055

1,055

2005 final

2.16

15

1,070

1,070

2006 interim

2.20

19

1,089

1,089

2006 final

3.87

35

1,124

1,124

2007 interim

2.35

17

1,141

1,141

2007 final

4.41

31

1,172

1,172

2008 interim

2.49

16

1,188

1,188

2008 final

5.02

42

1,230

1,230

2009 interim

2.57

22

1,252

1,252

2009 final

5.20

50

1,302

1,302

2010 interim

2.66

24

1,326

1,326

2010 final

5.65

48

1,374

1,374

2011 interim

2.85

21

1,395

1,395

2011 final

6.05

50

1,445

1,445

2012 interim

7.05

57

1,502

1,502

2012 final

6.47

51

1,553

With dividends reinvested in Vodafone shares, those 1,000 shares bought 10 years ago at 144 pence each would have grown to 1,553 shares today.

If an investor was prepared to forego income, then an outlay of 1,440 pounds on the shares 10 years ago would be worth 2,453 pounds today.

Vodafone has rapidly increased its dividend during those 10 years. The interim dividend in 2003 was 0.7946 pence per share, while Vodafone recently announced its 2013 interim dividend would be 3.27 pence per share. That's a 411% increase.

With an expected yield for 2013 of 6.4%, 1,440 pounds invested (and reinvested) in Vodafone now brings an expected income of 157 pounds for the year.

Few shares demonstrate the power of dividend reinvestment as well as Vodafone. In the last decade, the company has moved from being considered a growth share to an income share. While dividends have increased significantly, the share price has hardly grown -- and that stagnation has meant more shares could be purchased each year in lieu of dividend cash.

There is scope for things to get even better at Vodafone. For the second year running, the company has received a large dividend from its U.S. joint venture Verizon Wireless. Earlier this year, the first Verizon payment was distributed as a special dividend, which means our hypothetical shareholder could have purchased another 108 Vodafone shares.

From my own research, I have come to the conclusion that this special dividend could become more reliable in the future. To me, the income story at Vodafone has never looked better.

If you are interested in harnessing the power of income shares, I'd urge you to read what Neil Woodford has been buying. The legendary City fund manager has spent decades delivering huge returns to his investors by carefully selecting top income shares. Learn from one of the best in the business here with this free Motley Fool report: "8 Shares Held By Britain's Super Investor." To get the report delivered to your inbox immediately, simply click here.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Vodafone Group Plc Stock Quote
Vodafone Group Plc
VOD
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