Earlier today, I added some data to my personal notes on the performance of some typical blue-chip dividend stocks over the past twenty years, comparing the performance of the company with dividends reinvested to the same company with dividends paid out, but not reinvested. In case you're curious about the performance differential over a twenty-year period, here's what I found:
1. If you invested $10,000 into Exxon (NYSE:XOM) in 1993, and did not reinvest the dividends, you would have 610 shares today. That would be worth $68,000 at current market prices and the oil shares would be paying you $1,537 in annual dividends today.
But if you chose to reinvest your dividends over the past 240 months, you'd have 1,019 shares today. That would be worth over $90,000, and would generate $2,567 worth of growing dividend income every twelve months. With ExxonMobil's dividends reinvested, the compounding works out to over 11% per year.
2. If you bought $10,000 worth of Colgate-Palmolive (NYSE:CL) stock twenty years ago, and did not reinvest the dividends, you'd have 1,520 shares today worth $107,000. That amounts to a little over $2,000 per year in dividends. But if you reinvested along the way, you would have 2,235 shares today paying out $3,039 in annual dividends. You could sell your Colgate stake for a nice starter home (~$132,000), because your Colgate shares compounded at 13.8% annually over the past twenty years with dividends reinvested.
3. Now, let's take a look at Johnson & Johnson (NYSE:JNJ). With no dividends reinvested, a $10,000 JNJ investment in 1993 would be 1,015 shares today worth $113,000. You could count on JNJ for $2,679 in annual income, or $7.34 each day just for waking up in the morning. But if you chose to reinvest your dividends, the results get even better-you'd have 1,559 shares today worth $138,000 and paying you a little over $4,100 in annual dividend income (now we're talking $11.23 per day just for waking up!) because your investment would have compounded at 14.1% over the past twenty years.
4. Onward to Procter & Gamble (NYSE:PG). Without dividends reinvested, a $10,000 investment in 1993 grew to $84,000 and paid you just under $2,000 this year. But if you did decide to reinvest the dividends over the past two decades, you would have 1,292 shares worth a little over $102,000 paying out a little over $2,900 in annual dividends, because you compounded your money at 12.3% over the past twenty years.
5. As for IBM (NYSE:IBM), you would have dominated life over the past twenty years regardless of whether you reinvested the dividends. That is because the company has been growing earnings by about 15% per year over the past twenty years and had an absurdly low starting valuation in the early 1990s because of business troubles that proved to be temporary. Without dividends reinvested, a $10,000 investment into IBM stock would have grown into 952 shares worth $205,000 and paying out $3,617 in annual dividends. And if you chose to reinvest along the way, you'd have 1,201 shares worth $230,000 paying out a little over $4,500 in annual dividends, giving you a twenty-year compounding rate of 17.0%.
6. Now we're going to take a look at Conoco Phillips (NYSE:COP) (and as many of you know, the company has spun off its refining division, Phillips 66 (NYSE:PSX), in recent years. To adjust for this, I assumed that on the market close of Phillips 66's first trading day as a public company, you had sold your Phillips 66 shares and put them back into Conoco). If you bought $10,000 worth of Conoco stock twenty years ago and did not reinvest the dividends, you'd have 592 shares of the stock worth $56,000 today (by, the way, as a point of clarification, I am taking the market value of the current shares and adding them to the distributed dividends. So, in this case, the $56,000 figure is the result of 592 shares that could be sold for a little over $40,800 and the $14,900 in dividends that got paid out along the way).
But if you chose to reinvest, you'd have 1,077 shares (worth over $74,000) paying out over $2,973 in annual dividends, because your Conoco investment would have compounded at over 10.6% over the past twenty years.
I bring these facts to your attention for three reasons:
(1) First of all, reinvested dividends can add a 1-3% annual kicker to your returns (depending on how much the dividend is, and the price of reinvestment). That's the big secret of blue-chip investing: you own businesses that naturally grow at 8-10% annually, but you can get annual total returns in the 10-13% ballpark because of dividend reinvestment over the years.
(2) The lesson here is not that you should always reinvest back into the same company. I compared reinvested dividends to dividends not reinvested that remained as cash. Well, you're probably not sitting in cash that consisted of a dividend paid out in 1993 that you left static in a bank account. I have no idea what you could have done with those IBM dividends in 1995, J&J dividends in 1998, and so on, if you didn't reinvest them back into the company. But presumably you would have gotten some utility of that money than letting it sit in a bank account.
(3) A high earnings growth rate, over a twenty-year period or so, can do a lot more heavy lifting than something that returns gobs of income your way. For instance, Conoco typically has a dividend in the 4-5% range. Yet, after twenty years, a $10,000 investment would be giving you $3,000 or so in annual dividend income today. IBM, which has a dividend that typically hovers in the 1-2% range, would be paying out $4,500 in annual dividends your way this year. Of course, it takes a lot more unrealized capital (200,000+ in the case of IBM) to generate that kind of income. My answer to this dilemma is to own both.