The Power of Dividends

JNJ Products
From Johnson & Johnson Website

Few companies in America have been in business for more than  100 years, but one of those companies is Johnson & Johnson (JNJ).

JNJ is also one of those “Dividend Aristocrats” that some of you may have read about at some point in your investment research.

What is a “Dividend Aristocrat?”

It is a company that must be a member of the S&P 500 index and have a minimum of one dividend increase annually for at least the last 25 consecutive years.  Currently, in 2018, there are 53 such companies and I know you have heard of most of them.  I have a list of those companies that are considered Dividend Aristocrats in 2018.  If you would like a copy all you need to do is send me an email to freewavemaker@gmail.com and request it.  Simply put on the subject line:  Dividend Aristocrat List and I will send it to you.  Or, you can search the internet and get it on you own.

Johnson & Johnson is just one of those companies that we will take a look at today.

First of all understand this:  Just because companies pay dividends consistently and raise those dividends consistently … does not mean they cannot go up and down in value like any company on the stock market.  For example:  Look at this 22 year chart on JNJ:

JNJ Price
From Vectorvest.com

This daily chart shows that while the trend has been higher there were periods of correction from time to time (2000, 2008-2009, 2015 and 2018) to name a few.  However, look at this dividend paid chart on a year by year basis since 1996:

JNJ DIV HIST
From Vectorvest.com

As you can see, regardless of stock price or economic situation … JNJ has not failed in raising its dividends year after year.

As a matter of fact, you can find the same chart by going directly to the Johnson & Johnson website and looking under Investor Information:

JNJ Co DIV Hist
From Johnson & Johnson website

The dividend over this 22 year period has gone from $0.43 per share per year to a projected $3.54 per share per year (projected because the 4th quarter dividend due in December has not been paid yet).  What percentage was the increase on a year by year basis?  Check out the table below:

JNJ Increase Div Percentages
Calculated by Jerry Nix based on JNJ Website

Now, just in case you are wondering about the two returns you see (10.63% and 10.56%), the first designates the average amount of increase per year on the dividend paid while the second shows what it would take to grow $0.43 to $3.54 over a period of this many years assuming the growth was compounded annually.

You can see the total dividends paid by Johnson & Johnson each year since 1972 by simply clicking on this LINK to their website.  You will see the dividend paid in 1972 was not a lot (a mere $0.0093 per share).  So, 100 shares would have netted you about $0.93 in dividends that year and 1,000 shares would have made you about $9.30.  However, you have to remember the price per share was not that great either.  On December 29, 1972 the stock closed at just $2.72 per share.  Thus, 100 shares of stock would have been worth $272 and 1,000 shares of stock would have been worth $2,720.  Therefore, the dividend yield back then would have been about 0.34%.

Since 1972 the average increase in dividend payout from Johnson & Johnson has been about 13.96%.  Now, you can take my word for it or you can go to the website and make the calculations yourself.  If you need to see the historic stock prices just click on this Link.

THE POWER OF REINVESTED DIVIDENDS …

To show the power of dividends, I’d like to focus your attention on the past 21 years from 1997 through 2018.

Here we need to make some assumptions:

  • Your purchased 100 shares of JNJ at the closing price on January 2, 1997 at a price of $24.88 per share and did not pay any commission.  Your total investment was $2,488.00
  • You were an owner of at least 100 shares for each dividend paid since March 1997 (and JNJ pays its dividend in March, June, September and December).
  • In the first Scenario (non reinvested) you allow the dividends to set in your cash account earning money market rates of return.
  • Money market rates of return were as high as 6.69% in 2000 and as low as 0.15% in 2014.  The average return was around 2.42% over this period of 21 years … but we will use a return of 3% for this analysis.
  • In the second scenario will will assume dividends were reinvested at the closing price on the day paid (or in case of a holiday or weekend) the last trading day before the paid date.
  • Both Scenarios we assume the stock price in December, when the last dividend is supposed to be paid this year, is still at the current price of $145.34 which was the closing price on November 9, 2018 (it is actually at $145.85 as of this writing).

Scenario One – Not Reinvested:

In this scenario, your stock would have grown from $2,488.00 on the original 100 shares to a value of $14,534.00.

During the 21 year holding period you would have received $3,873.50 in dividends.

When added to the value of your stock you should have total capital of $19,463.56.

Therefore, the compounded rate of return on your original investment of 2,488 would be 10.29% per year.

Scenario Two – Reinvested Dividends

In this scenario, your stock would have still cost you $2,488.00 on the original 100 shares.

However, during the 21 year holding period you would have received $5,313.16 in dividends.  Assuming that you did reinvest these dividends on the date received (and this can be set up automatically – with no commission charges to you) you would have purchased an additional 67.92198 shares.  This would give you total shares at the end of the 21 year period of 167.82198

The total value of your stock holding in Johnson & Johnson would be $24,391.25 – clearly $4,927 more in total value as compared to Scenario one above.

Therefore, the compounded rate of return on your original investment of 2,488 would be 11.48% per year.  This is a difference of 1.19% as compared to Scenario one.  As a matter of fact, on a percentage basis, it is actually an 25.32% greater value (e.g $24,391.25 – $19,463.56 = $4,927.69 and $4,927.69 divided by $19,463.56 – 0.2532 or 25.32%).

Rolling into the future and the Magic of Compounding:

Now a 1.19% difference may not appear to be too great … but let’s take this forward for another 21 years assuming both scenarios duplicate the results:

  • Value of Scenario One in 2039 assuming annual returns of 10.29% per year would grow to $152,262.93.  Not bad considering you started 42 years earlier with $2,488.
  • Value of Scenario Two in 2039 assuming annual returns of 11.48% per year would grow to $239,120.95 or $86,858.02 (57.04%) more than Scenario One with the same starting capital of $2,488.

Action Steps:

For core portfolio holdings that you intend to hold for a long period of time (10 years or more) consider stocks that are on the list of “Dividend Aristocrats” and always reinvest the dividends for three reasons … (1) there are no commission charges for reinvestments and these are done automatically, (2) have confidence knowing that the dividend is going to increase every year whether the stock price does or not, and (3) it is the only way to purchase fractional shares of stock.

Finally, if you are intent on holding these for 10 years or longer … you may want to consider doing so with no stop loss orders.  And, if you have some extra cash laying around from time to time … buy more on the dips and increase your overall dividend income over the years.

Again, you can get a list of these “Dividend Aristocrats” simply by writing me or going to this website.

Have a great week,

Jerry Nix

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s