As I write this, shares of Verizon (NYSE:VZ) are trading around $52. If you were to look back three years to April of 2013, you would also see a share price around $52. And for some owners that sort of thing is bad news -- if you're rooting for a higher and higher share price, a stagnating set of bids isn't something that you're going to get excited about.
Yet for the long-term net buyer, and especially for the investor focused primarily on income generation, this is not the worst of news. Let's consider an investor back in April of 2013 to demonstrate what I mean.
A $10,000 starting investment during this time could have purchased approximately 192 shares. A lot of people get upset about an arbitrary starting mark, so feel free to move the decimal point as you see fit. The underlying income math is the takeaway, not starting with $1,000 or $10,000.
In March of 2013 Verizon declared a $0.515 dividend, with an April 9th ex-dividend date, to be paid on May 1st. We'll keep this example simple and suggest that you missed this first payment, but collected all of the dividends thereafter. In the coming year you would receive one $0.515 payment, followed by three $0.53 payments for a total of $2.105. Based on 192 starting shares, you would have received dividend income of $404 during your first year of holding.
In the next year you would have collected one $0.53 payment, followed by three $0.55 payments, for a total of $2.18. Presuming you spent all of your previous dividends and did not add shares, your income for the second year would have been about $418.50 -- a 3.5% increase as compared to the last year.
In the third year you would have started off by collecting a $0.55 payment, which was then followed by three $0.565 quarterly payments (note the last payment has not yet been paid, but it has passed the record date). This totals $2.245 per share, or $431 in annual income. That's a 3% increase as compared to the second year.
When you see a 3.5% and 3% dividend increase, it may be easy to think that this doesn't amount to much. Yet it helps when you start with an above-average beginning yield. The share price is basically at the same level as it was three years ago, but you would have collected about $1,250 in dividend payments along the way. Instead of a zero percent return as you might observe on a stock chart, you'd see a 4% annualized gain. Not exceptional, but a large difference from nothing at all.
Moreover, this gap tends to widen when you consider reinvesting dividends. Without laying out another dime of "fresh" capital or thinking about the security again, you could have collected $1 a day in dividends based on your beginning investment. If instead you elected to reinvest, you would now have more shares and a greater income stream.
After the first year you would have about $404 to reinvest. The share price at the time was just below $47, which would have allowed you to add over 8.5 new shares. In the next year you might have collected $437 in dividends.
As compared to your starting amount -- $404 -- this represents an 8.2% increase. Part of that was a result of "organic" dividend growth (increasing about 3.5%) and the rest of it was a result of adding new shares. This idea gets missed quite often when you're talking about higher yield/lower growth options. If you're reinvesting, your total income growth can be every bit as impressive as your lower yield/higher growth alternatives.
In the second year the share price was around $50. With $437 in dividend payments coming in, you could again add more than 8.5 shares of Verizon. By the third year you would have been generating $470 in annual income -- 7.4% higher than the previous year and well above the $431 mark that came about prior to thinking about reinvesting.
Just recently you could have reinvested around $52 per share, bringing your total share count up to just over 218. The value of those holdings would be about $11,350 -- representing an annualized return closer to 4.3%. To "break even" on a nominal basis, shares would now need to drop below $46 -- certainly possible, but this number gets lower and lower as more dividends are paid and shares are added.
Just as impressive, in my view, is the income side. Without reinvesting dividends, your annual income would have gone from $404 to $418.50 to $431. Moving forward you'd anticipate a higher payout in the coming year, but based on the present mark your yearly income would be around $434 -- a total increase of about 7.4%. On the other hand, with reinvested dividends, you could be on pace to generate $493 in annual income -- a total increase of roughly 22%.
This doesn't get talked about as often, but if you're reinvesting dividends, your total income growth from a company like Verizon can easily be in the 6% to 8% range. Moreover, our above example is based on annual reinvestment. If instead this is done on a quarterly basis, the process can compound even quicker.
Equally interesting is the idea that the reinvestment program benefited from a lower share price over the past few years. Had shares remained at $52 the entire time, your reinvested dividends would have purchased less shares and thus your future earnings claim and income stream would now be lower.
This is why I find that it pays to keep very profitable companies with above average dividend yields on your radar. It's easy to get caught up with the latest trend or the faster growing payouts of other firms. A few percent of growth a year from a company like Verizon doesn't seem like much, but it can add up quickly if you're reinvesting. A few years down the line, suddenly you're looking at a well above-average payout with total income growth in the high-single digits.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.