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Procter & Gamble Inc. (NYSE:PG) is a leading dividend stock and member of the Dow Jones Industrial Average. PG provides package consumer products to almost every corner of the world stretching across countless brands for everything from skin care to laundry detergent to snacks to pet food to batteries to razor blades. PG was founded in 1837 and is headquartered in Cincinnati, Ohio. PG had about $82.6 billion in revenue in fiscal 2011. PG has a market capitalization of $178.8 billion and an enterprise value of $211.1 billion. PG currently has a forward dividend yield of approximately 3.4% based on a forward dividend of $2.23 and a price of $64.97 per share.

PG has been a leading dividend stock for many years. Diligent investors who have reinvested their dividends have been able to watch their holdings grow substantially. The following graph shows the results of investing $11,000 at the start of 1970 and reinvesting all dividends since then.

Source: Developed from data from Yahoo Finance

$11,000 represented 100 shares at the time and without question was a very large investment for that time; however, I want to illustrate a few points about dividend reinvestment. In this article, I refer to dividend reinvestment as reinvesting in that specific stock. The total pre-tax return on this investment is 12.1% over the 40+ years. The key points are:

  1. Almost 60% of the value of the current holdings is attributed to reinvesting dividends.
  2. The graph clearly shows that the bulk of the dividends received historically are from reinvestment shares; however, 68% of the dividends received from the most recent dividend payment are related to shares purchased through reinvestment. It took 20 years for this ratio to reach 50%.
  3. The initial share position of 100 has since expanded into over 20,000 shares through reinvesting dividends and more significantly splits. Since 1970, PG shares have undergone 6 splits meaning that an investor would now have 64 shares for each of the original 100 shares purchased. However, this also implies that reinvesting dividends resulted in the other 13,000+ shares. Note that this does not mean you've purchased that many shares through dividends since those shares have also split.
  4. The appreciation of the shares purchased by reinvesting dividends is actually the largest component of the current holding value. This highlights the notion of picking solid stocks.
  5. The most recent round of dividend reinvestment would have resulted in the purchase of over 150 more shares, a figure larger than the initial starting position. The value of the dividends from the most recent 12 months totals over $40,000, figure close to the median wage earned by working adults.

However, dividend reinvestment is not without its risks as many people have found out with respect to banking stocks. These results have only occurred since PG has been a successful company for many, many years. Investments in other companies might not be successful. Furthermore, if the company goes bankrupt, everything is lost and it should be noted that even if you reinvest dividends, you still have been paying taxes on those dividends.

The other obvious comment is that $11,000 is an extremely large amount of money for most people, even today and let alone in 1970. However, had one invested $1,000 each year in the eleven years prior to 1970 and reinvested dividends, most likely that would result in a much larger initial position than just 100 shares. This would result in a greater amount than the $1.3 million but over 53 years - a period 11 years longer than initially considered. Alternatively, investing just $1,000 in 1970 would have still resulted in a position worth close to $120,000 today.

So what are the broader investment take-aways from this? Most people invest as a form of saving, primarily for retirement or perhaps to buy a house or fund college. This article highlights the benefits of time and compound interest. With a 12% compound annual return, it also shows it is not necessary to find the next internet wonder stock that will appreciate 100% in its first year. I would note that a 12% track record over 40 years though is quite good and so it might not be reasonable to expect even this level of performance just picking dividend stocks going forward.

The other key theme is consistency. An investor has to actively choose to reinvest those dividends, as noted they now represent almost 60% of the value of the current holdings. Choosing short term gratification by spending those dividends would result in a substantially smaller portfolio today.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

Source: Dividend Reinvestment: Procter & Gamble