Investing

Even if you simply buy a wide selection of different dividend stocks, you will still outperform the market over the long term.

But if you regularly reinvest the dividends, you can earn more than with any other investment over an extended period. Investors who choose the right stocks and reinvest the dividends in a disciplined way will generate fantastic returns.

This is explained in the Global Investment Returns Yearbook 2009 (London Business School, February 2009).

 

A well-conceived strategy

In an article in the yearbook “Keeping faith with stocks”, the researchers ask what we should expect from stocks. To answer this question, they studied data from 18 countries over the period from 1900 to 2008 and compared the real returns on equities, bonds and money market instruments.

The results were clear: Those who regularly reinvested the dividends beat all other types of investment by a considerable distance.

 

Example US stock market: - One US dollar invested in 1900 would have developed as follows by 2009 (in real terms):

Results in USD
Equities (dividend reinvested)	582.0
Bonds	9.9
Equities (without dividends)	6.0
Money market instruments	2.9

 

Big returns for little effort

How this applies in practice – and in a realistic time-frame for investors – can be seen in the following specific examples.

 

Example 1: BASF – EUR 10,000 invested at the end of 2003 (dividend yields reinvested on 31 December each year, 25% tax deducted from the gross dividend). This stock position would have developed as follows between then and today:

1. The net dividend yield would have risen from 2.3% to 13.0%
2. The number of stocks in the portfolio would have increased from 447 to 618
3. The purchase price would have fallen from 22.37 to 16.20
4. Net dividend income would have increased from EUR 232 to EUR 1,376

 

Example 2: Nestlé – CHF 10,000 invested at the end of 2003 (dividend yields reinvested on 31 December each year, 35% tax deducted from the gross dividend). This stock position would have developed as follows between then and today:

1. The net dividend yield would have risen from 1.5% to 6.1%
2. The number of stocks in the portfolio would have increased from 324 to 412
3. The purchase price would have fallen from 30.90 to 24.27
4. Net dividend income would have increased from CHF 150 to CHF 610

 

Example 3: British American Tobacco – GBP 10,000 invested at the end of 2003 (dividend yields reinvested on 31 December each year, 0% tax deducted from the gross dividend). This stock position would have developed as follows between then and today:

1. The net dividend yield would have risen from 5.0% to 35.0%
2. The number of stocks in the portfolio would have increased from 1,299 to 2,087
3. The purchase price would have fallen from GBP 770 to GBP 479
4. The net dividend income would have increased from GBP 498 to GBP 3,500

 

The compound interest effect

These dramatic improvements would not cost you a cent, just a few hours’ work each year.

This is because the companies have paid out an attractive dividend every year and increased it over the years – all you have done is regularly reinvest the dividends.

The more additional stocks you purchase, the higher your dividend income will be. At the beginning, there is little change, but with time the compound interest effect kicks in and your income increases disproportionately. According to Albert Einstein, compound interest is “the most powerful force in the universe”.

Price drops as an opportunity

You wouldn’t have to do much, since most of the work is done by the companies themselves. Nestlé sells its food worldwide, British American Tobacco produces billions of cigarettes a day, and BASF supplies the global economy with chemicals. All this goes on while you’re sleeping, watching TV or relaxing on vacation.

And the best thing about it: Price developments are completely irrelevant! You no longer have to worry about price drops. In fact, quite the opposite: low prices are a great opportunity to expand your portfolio and thus lay the foundation for an even higher income.

 

Let dividendpearls help

In addition to the necessary discipline, it is also essential to choose the right stocks, of course. You can expect to achieve these kinds of figures only if you invest in really good companies.

With its wealth of important information, dividendpearls.com can help you find the right dividend stocks.