Reinvesting your dividends is possibly one of the simplest ways to get rich with minimal effort.
You don’t need to be a hedge fund manager or billionaire to benefit from this strategy. All you need to do is select a group of dependable dividend-paying stocks, sit back, and relax.
In fact, the FTSE All-Share total return index currently stands at about 5501.4 — a full 50% higher than the standard FTSE All-Share index at current prices.
And if we include reinvested dividend payments, the FTSE 100 (FTSEINDICES:^FTSE) would be sitting above 9,000 right now.
Still, the FTSE 100’s recent performance excluding dividends is nothing to be sniffed at, although for the most part, recent gains have been driven by the prospect of deal activity within the biotechnology sector.
For investors who want to benefit from dividend reinvestment but are worried about stock selection a FTSE 100 tracker fund would be the perfect. In particular, the HSBC FTSE 100 Index fund which currently yields 3.2% with an annual expense ratio of 0.3%.
Bigger is not better
In the world of dividend investing, the size of the payout is not the only consideration. Investors also need to consider the quality of the company, as well as management’s commitment to the business and record of dividend payout.
For example, looking at historic figures, Man Group currently supports the largest dividend yield in the FTSE 250 of 9.1%. However, due to the nature of the company’s business the dividend payout is erratic. Specifically, the payout stood at 6.4p per share back during 1995, rising as high as 36p per share during 2005, before falling back to 10p during 2013.
Dividend champion
Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) tops the list of dividend paying champions, having consistently paid and increased its dividend every year since the end of the Second World War.
It would appear that this growth is set to continue as the company’s earnings are stable, and management has been sensible when it comes to approving payout increases.
In particular, since 2006 Shell’s management has increased the company’s dividend payout by 66%, around 8% per year, above inflation and in line with earnings growth, ensuring that the payout remains well coved by income.
Slow and steady
Cobham (LSE:COB) is one of the only companies with a payout history as lengthy as Shell’s.
Cobham is in the business of defence and internal security, along with related services and has maintained or increased its payout every year for the past 43 years.
Nevertheless, as defence spending around the world comes under pressure Cobham’s earnings are expected to stagnate over the next few years. However, once again Cobham’s management has been sensible and the dividend payout is covered at least twice earnings leaving plenty of room for payout increases over the next few years. Actually, City forecasts currently predict that Cobham’s payout will rise around 10% per annum during the next three years.
One of a kind
Unfortunately, Pearson’s (LSE: PSON) dividend history is not as lengthy as that of Cobham, but with 23 years of payout growth behind it, Pearson’s record is still impressive.
Owner of the world renowned Financial Times, one of the only newspapers reporting rising circulation, Pearson’s dividend yield currently stands at 4.4%. Further, the company’s payout is covered one-and-a-half times by earnings per share and above-inflation dividend increases are expected each year for the next five.
That’s not all
Aside from the three dividend champions above, there are plenty of other companies with illustrious dividend histories.
For example, the Daily Mail and General Trust has increased its payout every year bar one for the past 26 years, with a compound annual growth rate of 10.5%. Additionally, Capita’s record of dividends is unbroken since 1987, and the payout has expanded 2,760% over the period.
And finally, Imperial Tobacco has paid an increasing dividend every six months since it demerged from Hanson more than 17 years ago.
