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
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.
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