The Short-Term Benefits Of Dividend Stocks

Includes: COP
by: Tim McAleenan Jr.

I've spent a large portion of the past month or so giving examples of how dividend growth investing can be quite lucrative over long periods of time. A $10,000 Johnson & Johnson (JNJ) investment in 1980 would be worth $600,000 today. If you put $300,000 equally into Hershey (HSY), Colgate-Palmolive (CL), and Procter & Gamble (PG) in 1990, you'd have over $3,000,000 today. And so on. The magic of dividend reinvestment gets a lot of attention over the long-term. But they can help out in more immediate time frames as well.

Let's say that after the recent Conoco Phillips (COP) spinoff of Phillips 66 (PSX), you decided to make an investment of around $5,200 to buy 100 shares of Conoco which currently pays a $0.66 quarterly dividend. For the sake of this discussion, let's assume that Conoco increases its dividend to $0.70 per share next year.

Now, during the year-long time period between the $0.66 quarterly dividend and the increase to $0.70, Conoco will presumably make four payouts of $0.66 per share. Let's examine the difference between two choices that the investor can make.

Well, he can use the dividends to meet his living expenses by taking out cash distributions. These 100 shares will generate $264 and then when the dividend increase to $0.70 per share comes along, the investor will receive a 6.06% increase in his annual income.

But what happens if the Conoco investor chooses to reinvest his $66 dividends along the way before the increase to $0.70 arrives? For the sake of this illustration, we'll assume that dividends get reinvested at $53 per share for each payout.

The first $66 check buys 1.25 new shares, bringing the investor's total to 101.25 shares of Conoco Phillips. The next dividend check has increased to $66.83, which increases the share count to 102.51. The third Conoco payout is now up to $67.66, and this adds 1.28 shares of Conoco, bringing the total to 103.79. When the last Conoco payout of the $0.66 cycle arrives, the investor now has $68.50 to reinvest, adding 1.29 shares of Conoco, bringing the total share count up to slightly over 105.

So now what happens to the re-investor when Conoco raises its dividend to $0.70 per share? Since he is now working off a base of 105 shares instead of 100, the new dividend represents $294 in annual income (even more if he continues to reinvest). Comparing the new $294 in annual income to the first year income expectation of $264, we see an 11.36% increase in annual income just for twelve months of patience and dividend reinvestment. That's substantially higher than the 6.06% increase in annual income for the investor that declines to reinvest. For me, this represents one of the greatest tools in the dividend growth investor's arsenal: while the world sees a company raising its dividend from $0.66 to $0.70, the dividend re-investor is actually reaping a benefit as if the dividend on his 100 original shares got raised from $0.66 to $0.735. Mechanically speaking, this is due to the fact that the 100 shares turned into 105 shares paying out $0.70 quarterly.

My impression is that dividend growth investing tends to have a reputation as a strategy that reaps rewards over decades and even longer stretches of time. This reputation is no doubt well-deserved. But a dividend growth strategy can have significant short-term appeal as well. If a 10% increase in annual income from an investment satisfies you, then you can realistically achieve that goal with high-quality dividend growth stocks by merely checking the "reinvest dividends" box while waiting twelve months for the increased per share payout to arrive. This is one of the most unpublicized blessings of a dividend investing strategy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.