Let’s assume the GlaxoSmithKline (LSE: GSK) share price does not budge from its current level of 1650p, and the total annual dividend remains constant at 80p per share.
You invest £346.50 in 21 shares of Glaxo and collect 1,680p in dividends over the year. You buy another share and put the leftover 30p aside for later. You receive 1,760p in dividends over the next year, which you use in part to increase your share count to 23, and add the leftover 110p to the 30p you saved the year before.
At the end of year seven, you have been paid a dividend of 2,160p and can buy two additional shares because you also have 1,380p saved, which brings your share count to 29, and leaves 240p to be saved for later.
By the end of year 15, you own 40 shares in Glaxo and receive £30 in dividends to add to the £7.30 you have saved. The total value of your investment is £699.3 and assuming zero trading costs, no account fees, no return on surplus cash, and unchanged share prices and dividends, you have doubled your money.
Double down on dividends
GSK has not cut its dividend in at least 15 years. Annual payments have grown from 39p per share in 2002 to 80p in 2014, before being maintained up until and including this financial year according to the latest guidance.
GSK recognises the value that its shareholders place on their quarterly dividend payments and will avoid cutting them at all costs, and so dividend growth will only return when annual free cash flows can cover existing payments by 1.25 to 1.5 times and provide a comfortable margin of safety.
It should come as no surprise that there is a relationship between GSK’s share price its dividend yield. Investors may pile into GSK when the yield rises, and drive it down by bidding up the share price. Because of this relationship, and because dividends are expected to grow or be maintained rather than be cut, the assumptions made in the earlier scenario are not as implausible as they may sound.
Doubling your money with shares in GSK may take longer than 15 years, or it may take less, but it is quite likely that you will do it if you buy, hold, and reinvest your dividends.
This is a mature company with plenty of products in the pipeline to replace those that are losing their patent protection and a history of returning cash to its shareholders.
Don’t bank on a share price boom
Being mature means having a stable business in established markets. GSK is not burning through cash to establish itself. That does not mean that it is not spending money on research and development – it is – but it does enough to sustain itself and then returns a chunk of what is left over to shareholders.
Do not buy this stock if you are looking for its share price to double quickly. Do consider buying this stock if you would like a steady stream of income that is yours to do with as you please. Getting rich slow doesn’t quite have the same ring to it as doing it fast, but if you can reinvest your dividends over time you could very well double your money with GSK.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.