Do you have any doubt that investing in shares the best way to maximise your returns? Over the very long term, the stock market has simply hammered other forms of investment, wiping the floor with cash savings and money invested in gilts and other bonds.
A beauty from BT
But what about a concrete example of a recent period? Lets take a look at what an investment of 10,000 in BT Group (LSE: BT-A) (NYSE: BT.US) 10years ago would be worth today.
This time in September 2004, BT shares were changing hands at 185p apiece, and today theyve made it as high as 387p. Thats a 109% gain, and that alone would have turned your 10,000 into 20,920.
Whats more, the period covers the worst recession in recent decades and the accompanying stock market crash, and takes in a period from mid-2007 to early 2009 over which BT shares slumped by a massive 78%! That was a big crunch for sure, but from that bottom the BT price has multiplied five-fold.
Even if youd bought at the peak in 2007 and sat through the worst and held on, youd still be ahead today and if youd kept on investing in BT every year, youd be laughing.
But that 20,920 really is only part of the story, because youd also have enjoyed a juicy extra reward in the form of dividends. In the early part of the decade, BT was paying annual yields of around 5.5%. Dividends were cut during the credit crunch years, but theyre recovering nicely.
Over the 10 years, youd have accumulated another 5,550 in dividends, to take your total to 26,470!
But thats still not the end of the story. You see, if youd been investing for the long term and hadnt been looking for annual cash to spend, what would be the obvious thing to do with it? Why, reinvest it in more BT shares, of course!
And reinvesting dividends would have added yet another 6,660 to your pot, doubling the amount youd have in cash from dividends if you hadnt reinvested it.
So your grand total after 10 years would come to 33,130 youd have more than trebled your initial stake!
But heres where the big difference really pays off. Without dividend reinvestment youd have ended up with the same 5,405 shares that your original 10,000 would have bought but with dividends reinvested youd have a very tasty total of 8,327 shares heading into the next decade.
Now, we have no idea how the next 10 years will turn out, but something we do know is that youd be starting out 54% better off than if you hadnt reinvested your dividends!
Would it surprise you to hear that 1,000 invested in shares in 1899 would now be worth a cool 149,000? But that’s if you kept and spent your dividends. We’ve already seen what reinvesting the cash did for BT investors — and that same 1,000 in shares in 1899 with all dividends reinvested would have reached a staggering 22 million by today!
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.