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Dividends – A Long Term Investor’s Best Friend?

Supporters of long-term investing will often point to massive capital gains built up over many years to prove their point– just ask investors who have bought and held on to Amazon’s (NASDAQ:AMZN) shares since their May 1997 IPO for a 15,300% return. A $100 investment in Amazon in May 1997 would have turned into nearly $15,300 now.

Amazon has been in a turbo-charged growth mode for a long time and it does not pay a dividend. So, if a non-dividend paying company can provide such fantastic long-term returns, are dividends actually important?

Dividends provide a source of returns apart from capital appreciation in share price. Take the commercial and industrial testing-services company, VICOM (SGX: V01).  The company has seen its revenue and earnings grow by 10% and 17.3% per year respectively since 2005. Based on its underlying business strength, its share price has also appreciated by almost 520% from its 03 Jan 2005 closing price of $0.97 to around $5 today.

What might not be often noticed is that the sum of dividends paid out by VICOM since 2005 has actually generated a total return of 118% based on its 03 Jan 2005 share price!

There are other less dramatic but still potent examples of how dividends can help spice up returns for the long-term investor.  The instant-coffee maker, SuperGroup (SGX: S10) has achieved revenue and earnings growth of 15.3% and 17.7% per year respectively in that time period while having negligible or no debt on its balance sheet. This resulted in SuperGroup paying out dividends that have provided a 53% return for shareholders since January 2005.

The table below shows how the dividends paid by VICOM and SuperGroup have changed.

VICOM Financial Year 2005 2006 2007 2008 2009 2010 2011 2012
Dividends Per Share (cents) 8.5 14.65 18.25 9.25 11.8 16.1 17.6 18.2
Total Dividends Paid ($) $1.1435
SuperGroup Financial Year 2005 2006 2007 2008 2009 2010 2011 2012
Dividends Per Share (cents) 1.6 1.6 1.6 1.6 2.6 5.4 5.8 2
Total Dividends Paid ($) $0.222
**Note: SuperGroup’s 2012 Financial Year is not over yet.

Shares with good dividend yields are often highly sought-after by investors but with careful attention paid to the source of a company’s dividend, a reliable and growing dividend can provide a pleasant surprise in the form of substantial returns for the long-term investor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.