Education - The Short-Term Power of Reinvesting Dividends

When the next quarter’s dividends roll around, you decide to do the same thing. However, Altria’s Board of Directors voted to raise the dividend from $0.29 per share quarterly to $0.32, so your yield on initial investment just got a nice little bump up. You’re now able to buy $150.88 worth of Altria stock, and at a closing price of $20.91, you’re able to purchase 7.22 more shares, bringing your total to 478.73 shares.

Come December, you do the same thing, earning 478.73*$0.32=$153.19. At this time, the USA was in the throes of recession, so you were able to reinvest at $14.73, giving you 10.40 shares, bringing your total up to 489.13 shares. Now you’re ready to roll into the year 2009, ready for your Altria dividend train to continue to pick up steam. In March 2009, you receive a dividend for $156.52, netting you 9.60 more shares, at $16.30 a piece, bringing your total to 498.73 shares. Come June, you were able to pick up 9.47 more shares, giving you a total of 508.20 Altria shares.

Come September 2009, Altria has raised its dividend yet again, this time to $0.34 per share. On September 11th, 2009, you received $172.79 in dividends, netting you 9.53 shares. Just in time for the New Year, you received another $0.34 dividend from Altria. In addition, in December 2009, you picked up 8.81 shares, making you the owner of 526.54 MO shares as you enter the year 2010. 2010 was another nice year for Altria shareholders, as owners received a raise to $.35 per share in the first half of the year, coupled with a raise to $0.38 per share in the second half. Your four dividend payments in 2010 netted you: 9.05 shares in March, 9.34 shares in June, 8.82 shares in September, and 8.46 shares in December. By the end of 2010, you would have owned 562.21 shares of Altria.

Going into 2011, Altria maintained its $0.38 per share payout through the first half of the year. In March, your 562.21 shares would have earned you a $213.64 payout, giving you 8.53 more shares. And this past June, you would have 8.05 more shares, bringing you to a grand total of 578.79 shares. Now of course, Altria is an unusual example in that they have raised their dividend multiple times per year, and they have committed to paying 80% of the earnings to shareholders as dividends. But as the numbers show, that is not necessarily such a bad thing. Over the course of three years, you would have raised your Altria share count from 465 to 578.79.

You received $134.85 per share in dividends in 2008, now you’d be receiving $219.94 per share, and that number continues to grow. Your initial dividend yield on Altria would have been 5.39%, now your effective yield on initial investment is 8.80% just three years later. This is important to keep in mind. If you hear Jim Cramer say that Altria has only gone up from $21.50 to $26.30 since April 2008, that doesn’t quite tell the whole story. If you don’t take into account dividends, you might think your investment has only grown from $10,000 to $12,229.50. But counting reinvested dividends, you would now have $15,222.18. In just three years.

As this example makes clear, the power of reinvested dividends has been the difference between 52.2% returns and 22.29% returns for shareholders of Altria. And for companies that grow their dividends year-in and year-out, those returns will only magnify.