Put simply shares are just a proportionate ownership of a business (a share of the business) and dividends (from the word divide) are the share owner’s ‘share’ of the profit.  Explaining the long-term benefits of share price growth is relatively easy compared to explaining what I believe is the most attractive aspect of owning a share of a business – the growing value of the profit dividend!

Here’s why it’s difficult for some people to get their head around why dividends are the big winner for long term shareholders.

Future dividends – in $ terms – should represent a higher percentage (proportion) of the original price you paid for the share.  That is, the value of a dividend from a well-run business in 2022 should be higher than it is in 2012.

Following is an example of the changing value of a dividend over time. This matrix details the full year dividends for the 2002 and 2012 financial years for Woolworths Ltd (WOW):

Divs Paid 2002 Fin Year

Share Price 30/6/02

% of 30/6/02 Share Price

Divs Paid 2012 Fin Year

Share Price 30/6/12

% of 30/6/22 Share Price

 

2012 Div as % of 2002 Price

WOW  

$0.30

$13.15

2.28%

$1.24

$26.80

4.63%

9.43%

Source: Iress Market Technology

 

Some observations:

  • The dividend has increased by around 4 times over the 10 years
  • The 30 June 2012 share price is around 2 times what it was on 30 June 2002
  • For the investor who bought WOW shares on 30 June 2002, the 2012 dividend now represents a 9.43% income return on their original investment ($1.24/$13.15 x 100)

Let’s be very clear here: not every business will produce such results and the truth is – just like in your town or suburb – from time to time businesses fail completely or fail to achieve meaningful financial growth.  You can lose some or all of your money in such businesses.  However, the point is that as an economy grows and the dollar value of profits increases over time, the dollar value of dividends – from well-run companies – rises.

Following is a chart that details five different businesses including WOW:

Divs Paid 2002 Fin Year

Share Price 30/6/02

% of 30/6/02 Share Price

Divs Paid 2012 Fin Year

Share Price 30/6/12

% of 30/6/22 Share Price

 

2012 Div as % of 2002 Price

QBE  

$0.30

$6.64

4.51%

$0.65

$13.38

4.85%

9.78%

CBA  

$1.50

$32.93

4.55%

$3.34

$53.10

6.29%

10.14%

WOW  

$0.30

$13.15

2.28%

$1.24

$26.80

4.63%

9.43%

TLS  

$0.22

$4.66

4.72%

$0.28

$3.66

7.65%

6.00%

BHP  

$0.24

$10.30

2.33%

$1.03

$31.45

3.28%

10.00%

Average:

$0.51

$13.53

3.67%

$1.30

$25.67

5.34%

9.07%

Source: Iress Market Technology

 

Legend:

 QBE                           QBE Insurance

CBA                            Commonwealth Bank of Australia

WOW                        Woolworths

TLS                            Telstra

BHP                           Broken Hill Proprietary

 

There is generally speaking a pattern of share price increases and dividend increases. For the notional average price of $13.53 on 30 June 2002 this ‘investor’ in 2012 received a dividend of $1.30 – 9.07% of the original investment.

Almost as a bonus, the investor can derive some comfort that the average share price has risen substantially.

IMPORTANT – THIS IS NOT INVESTMENT ADVICE

This discussion is not a recommendation for readers to invest in any or all of the specific investments, or types of investments, discussed in this blog. Please do not act to make investments based in this commentary.  This is a general discussion about some aspects of investing and cannot account for all circumstances.

Readers should seek their own professional advice which can take account of their personal financial position and objectives.

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