Wednesday, September 29, 2010

The Dividend Matters

Why dividends (especially when reinvested) are a much bigger deal than some realize...

Reinvested dividends actually make up almost the entire total return in the long run. This Barron's article points out:

Since 1929, $ 100 invested in the S&P 500 would be worth $117,774. Out of that $117,774 only $4,989, or 4.2%, came from capital appreciation. That means 95.8% of the total return was dividends and the reinvestment of those dividends.

Here's a more recent example.

Today, Coca-Cola pays $ 1.76/share in dividends...roughly half what it earns. 25 years ago it was selling at ~$ 2.90/share. What probably looked like a modest dividend back in 1985 has grown to what is now a roughly 60% annualized dividend on the $ 2.90/share an investor paid back then. So every two years the rate of cash dividends being received by a 1985 buy-and-hold investor exceeds the amount originally paid for the stock.

That dividend, of course, should continue to grow.

If those future dividends are reinvested, 25 years from now that original $ 2.90/share price paid is likely to seem like a small fraction of an afterthought.

Adam

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