Turn £10k Into £35k With Diageo plc

DiageoWhen people think of the big stock market stories of the past decade, it’s usually the big winners like ARM Holdings, which would have given you a nice 12-bagger, or disasters like Lloyds Banking Group which would have lost you 65%.

But what about all those good-but-plodding companies?

Slow and steady?

Today I’m going to look at drinks giant Diageo (LSE: DGE) (NYSE: DEO.US), the owner of such iconic brands as Gordon’s, Hennessey, Johnnie Walker, Smirnoff, Captain Morgan and many others. Assuming an initial investment of £10,000 at the end of September 2004, how much would your shares have been worth ten years on at the end of September 2014?

The easy bit is the share price itself, and from a 2004 price of 690p it would have ended September this year at 1,785p for a gain of 159% (although the price has actually dropped back a little over the past two weeks to 1,723p as I write).

So, you would have turned your original £10,000 into £25,870, which is pretty good going by any standards — especially as a FTSE 100 index tracker would have left you with only around £14,000.

But that’s ignoring one of Diageo’s key strengths — its reliable dividends. The yield has dipped a little below the FTSE average over the past couple of years, which is mainly because of the strong share price gains, but for most of the decade it has comfortably beaten the average.

A wodge of cash

And over the period, dividends would have added an extra £5,438 in cash to your total, to take it up to £31,307.

As I like to point out when I’m doing these calculations, good solid dividend-payers like Diageo can beat money in the bank on dividends alone, and you can see any actual share price gains as a bonus!

Now, that dividend taken as cash would have given you a reliable income stream. But if you hadn’t needed to use it and had instead reinvested it in more Diageo shares each year, what difference would that have made? If a share price is higher today than its average price over a past period, then reinvesting over that period is going to give you more gains, and that’s exactly what has happened at Diageo.

Reinvesting would have added an extra £3,903 to your total, to bring it to £35,210.

The next ten?

Will the next ten years be as good to Diageo shareholders? It’s obviously impossible to say, but if we bear in mind that the decade just gone covered the banking crisis and the worst recession in recent memory, then I think we can allow ourselves a little optimism.

And, at the very least, we’ll be starting the next decade with around 1,970 Diageo shares rather than the 1,450 we started out with a decade previously.

A well-balanced portfolio chosen from a number of sectors really is the best way to build yourself a healthy retirement pot, but should Diageo be one of them?

You have to decide for yourself, but the Motley Fool's latest analysis of Five Shares To Retire On should give you some welcome help. It covers five very solid blue-chip shares and tells you why our experts thing they'll serve you well in the decades ahead.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended 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.