I recently took a look at how an investment in ARM Holdings10years ago would have fared, and the result would have been nothing short of spectacular.
ARM, of course, has been almost a pure growth play although the effect of even its very modest dividends was significant. And that set me thinking about how a pure dividend play thathad experienced no capital growth over 10years would have done.
As it happens, J Sainsbury (LSE: SBRY) fits that bill just fine, though not through the companys design. With the woes of the supermarket sector epitomised by Tescos fall from grace, Sainsbury shares are priced at almost exactly the same level now as they were ten years ago to the day 261p as I write against 263p back then.
No change over 10 years
Thats a fall of 0.7% over the period, and it would have turned an investment of 10,000 this time in 2004 into 9,924 today, for a loss of 76 and I doubt theres a FTSE 100 stock that has been closer to flat than that.
Now, how much difference did those all-important dividends make?
Well, 2004s dividend was cut quite hard from the previous years, so were starting from a rebased low level. Wed still have seen a 3% yield that year, and since then the annual cash has been hiked every single year from 7.8p per share for the year ended March 2005, Sainsburys dividend was up to 17.3p by 2014.
The yield slipped during the first few years of our decade as Sainsbury shares got into a bit of a bubble, but that faded and yields over the past few years have come in at around 4-5%.
The overall result
Dividends would have added an extra 4,949 to our total, and taken that initial 10,000 to 14,873 and though a 48.7% gain over ten years is not great by stockmarket standards, it would still have comfortably beaten cash in a savings account at the bank.
Thats taking the cash each year, so what would have happened if wed reinvested our dividends every year instead?
If a share price is flat overall over a lengthy period, intervening volatility would, on average, be expected to contribute positively towards our end result if we keep on investing throughout. But in the case of Sainsbury, the whole of the period saw prices higher than todays, so reinvestment would actually have lost us some money.
Wed have ended with 14,503, which is 369 less than if wed just kept the cash but still 45% up.
Hindsight not allowed
Obviously we cant use this hindsight to pick and choose which company dividends to reinvest and which to keep, but it does show us that reinvesting dividends is not guaranteed to enhance our profits though if we expect a generally rising stockmarket, on average it should be a good thing to do.
But the bottom-line lesson is that dividends matter a lot!
Investing some cash in J Sainsbury shares ten years ago wouldn’t have been your best move, but it still wouldn’t have been bad. But where are the leading lights of the investing world putting their money today? Take a look at where TMF’s top writers think The Smart Money Is Going by getting a copy of their latest hot report.
There’s a variety of strong companies examined, which are growing their earnings and paying handsome dividends.
Just click here to get your hands on our experts’ thoughts today.
Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended shares in ARM Holdings and owns shares in Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.