Turn £10k Into £121k With ARM Holdings plc!

ARM HoldingsI’ve been looking at the records of some of our top FTSE 100 shares over the past ten years, and it wouldn’t be the same without ARM Holdings (LSE: ARM) (NASDAQ: ARMH.US).

This time a decade ago, ARM shares were selling for just 84p, and a £10,000 investment would have bought you 11,904 of them.

Sales storming ahead

Since then, the Cambridge-based mobile computing chip designer has seen its market rocket, as sales of the chips used to power iPhones, iPads and all manner of other gadgets has spiraled into the billions. That, in turn, has brought in year upon year of soaring profits.

And we know what has happened to the share price — it’s eleven-bagged in ten years, to 937p as I write.

On share price alone, that would have turned an initial £10,000 invested in 2004 into £111,548 today.

Any dividends?

When it comes to dividends, ARM has been paying them but at a yield of less than 1% for most of the decade. So that’s not going to make much difference then, you might think. But you could be surprised.

The shares are currently on a forward P/E of 41, and if we were to assume a transition to an alternate universe where ARM had gone ex-growth and was valued at a more average P/E of 14, the same dividend would be yielding 2.1% — and last year you’d have had a dividend return of 6.8% on your original investment 10 years ago.

So how much difference would a dividend that has grown from 0.7p per share back in 2004 to 5.7p last year have made?

Keep the cash

Taking it as cash, you’d have added an extra £3,064 to your pot. That’s not much when compared to your eleven-bagger price rise, but it’s getting on for a savings account return — so you could consider the rest of your total of £114 grand as a bonus!

But unless you actually need the income, by far the best thing to do with annual dividend payments is reinvest them in more shares. And if you had done that…

Well, the share price alone would have taken your investment to £111,548, and dividends taken as cash would have bumped that to £114,612.

Even with ARM’s lowly yield…

But reinvested, those same dividends would have taken your total to £121,265 — £6,653 more than if you’d spent your £3,064 of dividend cash, and that alone is way more than a savings account would have returned on a £10k investment.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended shares in ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.