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I have a decision to make.
Apple(NASDAQ: AAPL) will start paying a dividend on Aug. 16. Should I check the box in my brokerage account and reinvest the dividend in more shares, reinvest the dividend elsewhere, or to quote Steve Miller, “take the money and run”?
Some of the factors that I need to consider include if current income is needed from the payout, whether the extra shares result in the value of the stock comprising too large a portion of the overall portfolio, whether reinvesting will result in better overall portfolio performance, if a better return can be found elsewhere, and if the dividends are needed to pay taxes (or buy a yacht).
I don't need the income right now, but maybe when I retire I will. I try to stick to the 5% rule: no single stock should comprise more than 5% of the portfolio. If Apple continues to perform well -- and there is no reason not to expect that -- and the dividend is used to buy more shares, it might comprise more than 5%. Based upon historical trends, in general, reinvesting dividends will result in better performance over the long haul. Also, dividend stocks, in general, perform better than those that do not pay a dividend. In 2013 taxes on dividends may rise from the current 15% rate. However, I don’t think anyone really knows for sure what may happen.
Here’s an example of the process that can be used to determine if stocks, in general, perform better with dividends reinvested. There is a caveat. Past performance is no guarantee for future success but when looking at long-term dividend payers it provides a good indication.
I looked backward at six stocks over the period August 1997 to the present and compared performance with and without reinvesting dividends. I own three of the stocks. I looked at stocks in different sectors. All are members of the Dividend Aristocrats -- stocks that have increased their dividends each year for at least the last 25 consecutive years -- or Dividend Achievers -- stocks that have increased dividend payouts for at least the last 10 consecutive years. Most of the stocks have been paying dividends for a very long time.
The stocks that I own are International Business Machines(NYSE: IBM)Johnson & Johnson(NYSE: JNJ), and Coca-Cola(NYSE: KO). The stocks that I don't own are ExxonMobil(NYSE: XOM), Deibold (NYSE: DBD) and 3M(NYSE: MMM). Currently I reinvest the dividends in the stocks that I own.
I assumed an initial investment of $1,000 per stock and no additional investments in any of the stocks. The portfolio values do not include the effects of taxes and inflation and are in current dollar amounts. Adjustments based upon all activity such as splits, divestitures and mergers, etc. are included. For the case of no reinvestment, the dividends paid were not invested elsewhere (i.e., were held in non-interest paying instruments).
I used a dividend reinvestment backtest calculaltor from the web site Buyupside, which can be found here.
The performance of my model portfolio can be found in the tables below. Table I contains the model portfolio without dividends reinvested. Table II contains the model portfolio with dividends reinvested. Reinvesting dividends provided a better return. The difference in portfolio value was $3,605 ($25,119 vs. $21,513). The total amount of dividends received was greater with reinvestment ($4,610 vs. $3,712).
All of the individual stocks performed better, overall, with dividends reinvested, including those that didn't have such a great return just on its stock price alone like Deibold.
Of course if the dividends received but not reinvested in stock ($3,712) were put to use elsewhere there might have been different results. The funds needed to double in value over the 15-year period. Note that the S&P 500 increased by about 1.58 times. A "better than average" investment may have beaten reinvesting dividends.
I also ran the same portfolio over a 30-year period beginning in August 1982. The difference was astounding. The portfolio with dividends reinvested was valued at $844,910 more than the portfolio with dividends not reinvested. The dividends not reinvested over that time totaled $84,160. Note the overall performance may have been better with the dividends received used in other investments. The S&P 500 has increased about 9% per year on average since 1982.
So what should I do? Some of the information points to reinvestment; one, proportion of Apple stock to overall portfolio, points to not reinvesting and one, possible changes in tax policy, was inconclusive. Whether other investments may return more is speculative but possible if good investment practices are used. My thought is that I probably couldn't do better than reinvesting in Apple stock anyway at this point in time. I only have a few days left to decide. I better get going.
Table I Model Portfolio Without Dividends Reinvested (Aug. 1997 to Aug. 2012)
Stock
Initial # Shares
Current # Shares
Initial Price
Last Price
Cost Basis
Current Value
Dividends Paid
Current Value + Dividend
IBM
23.23
23.23
$43.04
$198.76
$1,000.00
$4,618.00
$428.00
$5,046.00
KO
24.07
24.07
$41.55
$80.64
$1,000.00
$1,941.00
$408.18
$2,349.18
JNJ
48.8
48.8
$20.49
$68.84
$1,000.00
$3,360.00
$921.91
$4,281.91
XOM
45.58
45.58
$21.94
$87.45
$1,000.00
$3,986.00
$831.36
$4,817.36
DBD
30.49
30.49
$32.80
$32.66
$1,000.00
$995.73
$367.73
$1,363.46
MMM
31.73
31.73
$31.52
$91.41
$1,000.00
$2,900.00
$755.23
$3,655.23
Total
$6,000
$17,801
$3,712
$21,513
Table II Model Portfolio With Dividends Reinvested (Aug. 1997 to Aug. 2012)
Stock
Initial # Shares
Current # Shares
Initial Price
Last Price
Cost Basis
Dividends Paid
Current Value (Inc. Dividend)
IBM
23.23
27.74
$43.04
$198.76
$1,000.00
$474.30
$5,513.97
KO
24.07
35.05
$41.55
$80.64
$1,000.00
$502.99
$2,826.07
JNJ
48.8
71.54
$20.49
$68.84
$1,000.00
$1,142.28
$4,924.97
XOM
45.58
67.45
$21.94
$87.45
$1,000.00
$1,059.44
$5,898.09
DBD
30.49
46.41
$32.80
$32.66
$1,000.00
$458.87
$1,515.87
MMM
31.73
48.57
$31.52
$91.41
$1,000.00
$972.12
$4,439.77
Total
$6,000
$4,610
$25,119
Mathman6577 owns shares of Apple, Johnson & Johnson, International Business Machines, and The Coca-Cola Company. The Motley Fool owns shares of Apple, International Business Machines, Johnson & Johnson, and The Coca-Cola Company. Motley Fool newsletter services recommend Apple, Johnson & Johnson, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
