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One Important Point About Dividends You Shouldn’t Miss

The Straits Times Index (SGX: ^STI) tracker, the SPDR Straits Times Index ETF (SGX:  ES3), has been a fixture in our local stock market since 11 April 2002. From then till 30 Nov 2013, it has delivered a compounded annualised return of 5.27% in price. That might not set many hearts aflutter as it would take an investor more than 14 years to double his money at that rate of return.

But, if the fund’s dividends have been reinvested all these while, it would have delivered a compounded return of 8.45% per year in the same time period. In other words, an investor would have been able to double his money with the ETF every nine years.

The power of reinvested dividends thus becomes huge when viewed through the lens of time. And, that’s the important point about dividends we shouldn’t miss; we should never forget to put those dividends to work.

American cigarette maker Altria had achieved mind-boggling share price gains of 10,800% from the late 1960s till March 2011. Factor in reinvested dividends however, and those returns, at 255,000%, become fit for dynastic wealth building.

We do not have such extreme examples here in Singapore, but we do have other instructive ones as well, apart from the SPDR STI ETF.

For instance, take the conglomerate Jardine Cycle & Carriage (SGX: C07). At the start of 2004, it was selling at S$6.00 a share and carried a historical dividend yield of only 1.5% based on its pay-out for its last completed financial year. That seems paltry doesn’t it?

From then till today, the company’s shares have appreciated in price by some 576%. But, if an investor had reinvested those ‘small’ dividends through the years, shares of Jardine Cycle & Carriage would have achieved a total return of 834%. That’s a difference in returns that’s definitely not negligible.

Of course, Jardine Cycle & Carriage had grown its dividend tremendously throughout the years and that makes the contrast between the returns achieved with and without dividends all the more obvious. But, at the same time, that doesn’t take away from the main point that dividends can and do make a lot of difference to a long-term investor’s returns.

That said, it does not always make sense for an investor to reinvest his dividends automatically as the money coming in could be put to use in better opportunities elsewhere or kept as a cash buffer to take maximal advantage of market corrections. Nonetheless, this also highlights how one should not forget about putting those dividends to work the moment they can, no matter how small those amounts might be.

Apparently, John D. Rockefeller, one of the richest Americans who ever lived, once said, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” Knowing the power that dividends wield over long-term shareholder returns, I’m unabashed to say that dividends give me pleasure too.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.