DRIP

DIVIDEND REINVESTMENT PLAN

UNDERSTANDING "POWER OF COMPOUNDING" & DIVIDEND REINVESTMENT ARE THE FOUNDATION OF INVESTMENT.



The example below says it all.

"........Look at the history of Coca-Cola.  It went public on 1919 at $40  a share. Today, one of those single  shares is worth $248,000.  But with its growing dividends reinvested it is worth  a stunning $6.7 million.  ( By the way, that  original $40 share is now throwing off $221,163 in dividends a year!)"

 

EFFECT OF DIVIDENDS ON GROWTH OF INVESTMENT
Usually stock returns are derived from future stock price appreciation and dividends paid for each share by the company. Dividend is a stockholder’s share of profit of the company’s profits paid to stockholders, usually in cash, rarely in more stocks (shares). Stock and share are the same and either may be used for the same purpose. The main idea behind paying stocks as dividend by the company is to preserve cash for the company's future needs. Not all companies pay dividends to their shareholders. Companies may reduce or stop paying dividends if a company’s earning falls. Many companies not only consistently pay dividends, but also increase dividends year after year.
Why full dividend reinvestment is a must to accumulate great sum of wealth is discussed below. Dividends that are are fully reinvested by buying more of company’s stocks creates a compounded growth rate of return, resulting in a huge sum over a long period. This is due to the power of compounding,as discussed in the previous chapters of this book.
The Dow Jones, S&P 500, NASDAQ, Wilshire 5000 Indices do not include dividends paid yearly in the rate of return. This is a very important factor that investors should be aware of. The real return of Dow including reinvested dividends would make the value of the "index to be over 250,000 points today" (1). This is compared to Dow values since inception in 1896 of less than 100 to maximum of about 14,000+ in 2007). "It is commonly known that it took the market 25 years to recover from its 1929 peak and the Great Depression. However, the inclusion of dividends in the index mitigates the effects of the Great Depression. A new all-time high is reached in January 1945 instead of November 1954 if dividends are included" (2).
If $107.23 was invested on 12/31/1919 into a Dow Jones index fund and all dividends were reinvested for more fund shares, the dividend income would have grown from $5.80 in 1920 to $8,715.12 by 2005 and the total investment (appreciation + dividends) would have grown from $107.53 to a $371,028.01 (3

"Why dollar-cost average into these stocks now? Because the data from those really, really monstrous bear markets, the ones that accompanied the Great Depression, show that investors who bought dividend-paying blue chips and reinvested the dividend did just fine in the bear markets that lasted from 1929 through 1942." (4)
The Dow Jones Industrials dropped 87% from August, 1929 through June 1932. Even in April of 1942, the Dow stayed down to 74% from August, 1929 level. The Dow did not recover to 1929 price level until 1954. So an investor had to wait to break even from 1929 until 1954 if only the stocks prices were considered (4).
"But an investor who had collected dividends and reinvested them would have seen a 340% total return by 1954, according to the Wharton School's Jeremy Siegel, the author of "Stocks for the Long Run."" (4).
In a bear market as the stocks prices go down, dividend yields go up. The investor will get more dividend for each new and old invested dollar. An example of this is: Intel stock paid 1.95% dividend on Nov., 3, 2006. The yield became 4.64% on Feb., 24, 2009 as the price of Intel stock fell (from $20.51 to $12.57) plus increases in Intel's annual dividend from 40 cents a share in 2006 to 56 cents a share in 2009, a 40% increase. The bulk of the yield was a result of the drop in the stock's price (4).
The a
bove example indicates why even in a bear market one should keep investing to get the full benefits of dividend paying stocks.

The Table 66 is based on the interview of Sir John Templeton by Luke Rukeyser in his MPT ( Maryland Public Televesion) Television show " The Wall Street Week" in 10 January1997, Program # 2628- page13.

"RUKEYSER: You've noted that the Dow Jones Indusatrial Average has risen eight times since you  were on the program in 1982. What are the chances it will rise another eight  times in the next 15 years?

TEMPLETON: Very, very slim. But let's look at this way. Suppose I had been on your program at the very top day in 1929. The Dow Jones at that time  reached 381. If you had put a million dollars into the market then, today you would have $17 million, or if you had reinvested  your dividends you'd have $250 million today.

RUKEYSER: John Templeton, Thanks very much. I wish I had had a million then."

( "The Dow Jones topped out at 386 in Sep 1929,..."

Reference:Saturday, March 22, 2008. Dow Jones Industrials 1929 Pattern. http://niftywhatcanhappen.blogspot.com/2008/03/dow-jones-industrials-1929-pattern.html )

The morale of the above fact that it is not  the amount money one has initially invested,

(a) it is the time  one gives to "Power of Compounding" to work on the investment. In this case  approximaftely 67 years (1927 to end of 1996),

(b) one need to invest new money on the Dow Jones  as frequently as she/he could, beside reinvestment of all dividends. In this case yearly average dividends  during this period was less than ? 3%.

Table 66 shows the end value of a one million d

ollar investment in Dow Jones stocks from 1929 to  end of 1996 (approximately 67 years), with and without dividend reinvestment.


Table 66

Amount of Dow Jones Stocks Purchased

in

Millions of $

Year

Investment Started

Dividends Earned

Year Investment Ended

End Value of Investment in Millions of $

1

1929

Not Reinvested

1996

17

1

1929

Reinvested

1996

250

The incredible end values in Table 66 above illustrate the benefit of fully reinvesting all dividends, consistently, year after year, over a long period of time. Further, the value of the investment will grow even more rapidly if the company raises its dividends every year. Even more so if small amount of principal is added frequently. Full Dividend Reinvestment year after year for a long period is the backbone of the

investment and is one of the best ways to accumulate a great deal of wealth. 70 percent of the total returns for some investment growth comes from dividend reinvestment (5).
"First the dividend yield, an important part of long- term stock market returns. In fact, in the long-term the stock market return of 9.5 percent is a 4.5 percent dividend yield and 5 percent earnings growth" (6). This dividend yield was either referred to S&P 500 index fund or Dow Jones index. "In his book, Stocks for the Long Run, Wharton Professor Jeremy Siegel proves that stocks have been the best performing investing for the past 200 years in the US. Equities outperformed other assets classes such as gold and fixed income..... Dividend payments have historically accounted for 40% of the average annual stock market return. A lesser
known fact is that reinvested dividends have provided for 97% of historical stock market returns" (7).

Lipper Analytical Services , Inc reported that between 1975 to 1990, the Dow Jones Industrial Average totally gained  831%, of which 485% (58%) was due to dividend reinvestment (8) .


Readers should note the ranges (40 to 97%) mentioned as regard rate of return of the dividend quoted by various authors. This differences  could be due to  many factors, most likely mainly due to stock selection in the porfolio and market conditions - bear or bull market.


The f

ollowing section shows the difference between investing in the present format of social security fund investment Vs. S & P 500 index investment with effect of reinvestment of dividends and inflation.
The table 67 shows the average annual special-issue interest rates and effective annual interest rates (%)*and rate return of S&P 500 index between 1/1940 (since inception) and 12/31/2007 = 68 years (9,10).