I previously wrote an article about Johnson & Johnson (JNJ) to review its performance and the impact of both dividend reinvesting and periodic stock purchases. Over the long run, these activities, with the right stock, can really pay off. After 40-plus years, a small initial investment and periodic purchases can transform into a million-dollar position.
Dividend reinvestment takes time...
It is important to recognize that it takes a while to build up a large enough position of stock from reinvested dividends, before they will begin to contribute a material amount of the total dividends (relative to the initial stock purchase). The following chart shows the ratio of dividends from shares purchased with dividends relative to all dividends received (from shares purchased with dividends and the initial investment). For this analysis, I did not consider any recurring purchases of JNJ, which would further complicate the picture.
Source: TCB Capital Advisors LLC
Looking at the chart shows very little impact for the first five years, which makes intuitive sense. JNJ's dividend yield was relatively low then. Assuming a 1.0% annual yield or approximately 0.25% per quarter, the first quarter wouldn't even produce enough dividends for a single share. (This analysis assumes that you can purchase partial shares). However, after seven years, the amount is over 5%, meaning that for every $20 in dividends of income, $1 was from stock purchased with previous dividends. After about 14 years, this ratio is up to 20% and then after over 20 years, it is almost 35%. After almost 38 years, the ratio shifts to about 50/50. From here, it will continue to tilt in favor of dividends from stock purchased with dividends.
The chart is also not a straight line, it actually has some slight waves in it. These fluctuations reflect changing dividend amounts over time. The following chart shows the trailing twelve month dividend yield for JNJ:
Source: Calculated from Yahoo!Finance data
One can clearly see that the dividend yield fluctuates. In the late 1990s, it was down under 1.5%. On the previous graph showing the percentage of dividends from reinvested dividends, the late 1990s showed a slight flattening of the growth trajectory. As dividend yield increases, that curve will rise more sharply. As dividends decrease, the growth will slow. However, the first curve will always increase if the company is paying dividends. Also, one can see that in the late 1970s to early 1980s, when the yield was high, the first graph showed more rapid increases in dividends from reinvested dividends.
So what should an investor do with this information? Reinvestment programs take time to show material changes; however, they also have the potential for a snowball effect that can show more impressive results.
Additional disclosure: 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.