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Chevron Corporation (NYSE:CVX) is one of the world's largest oil companies with both upstream and downstream operations. I had previously looked at CVX due to its strong track record of paying dividends with consistent growth. In fact, CVX has often raised its quarterly dividend payments more frequently than an annual basis that many other companies apply. With a recent closing price of $112.45 and an estimated forward dividend of $3.78, CVX has a reasonable forward yield of 3.4%, which is above the market average, but below many other quality dividend stocks.

Great Returns - Even Better with Dividend Reinvestment

An investor in CVX has been well rewarded over the last forty years, regardless of whether they reinvested dividends or not. However, there is a startling difference between reinvesting dividends and not reinvesting dividends. In early 1970, a single share of CVX was $52.25. Today, that share is now 16 shares, each worth $112.45 or about $1,800. This alone provides a return of 8.6% without even considering dividends. Over these past 43 years, that single share of CVX, valued at $52.25, provided $665 of dividends. Clearly this raises the total return by a noticeable amount. Assuming no return on these dividends and ignoring taxes would boost the 8.6% return to 9.4%. This is not a big increase, but the assumption of no incremental return on dividends is quite extreme. Even a small return on those dividends would substantially raise the 9.4% again. However, reinvesting those dividends would have boosted the pre-tax return to 12.6%.

The following chart shows the breakdown of the investment in a single share purchased at the start of 1970 with dividends reinvested.

click to enlarge image

Source: Yahoo!Finance for price and dividend information, author calculations. Note these calculations assume that one can DRIP a single share and purchase small fractions of a CVX, which might not be true.

The above chart clearly shows the power of reinvestment. That one share now produces about $70 per quarter in dividends, which is more than the initial investment. The value of that initial share is now worth about 160x the purchase price - a return that would make even a venture capitalist blush. Extending the logic, if an investor purchased 125 shares on January 2, 1970 for about $6,531, they would now have over $1 million in stock producing about $35,000 in annual income.

Success still requires good stock picks

While the value of dividend reinvestment is apparent in this case since CVS was a strong performer throughout the years, it might not hold in other cases. For example, if CVX goes bankrupt, then the investor would have lost the entire investment, in addition to any taxes paid for the dividends. Note that even though the dividends are reinvested, the stock holder is still liable for taxes on that income. Without question, this is a key consideration for long term investors who choose individual stocks to drive their portfolio. However, it is clear that a well chosen portfolio with dividends reinvested and some incremental investments over a 40 year period should position one for retirement.

However, the key take away with this illustration is that investing is often about consistency and patience. Time is one's greatest ally - especially with respect to dividend growth investing.

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: Chevron: The Benefits Of Dividend Reinvestment