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Wednesday, 25 October 2017

Don't Forget The Dividends!

Side effect of global warming? 
Back in 2012, I decided that I wanted to start investing directly in shares on the JSE. After a crash course consisting mostly of YouTube videos about reading financial statements and evaluating companies, I was of course an expert stock picker, and ready to hit the market with my new found skills.

I did an "expert" analysis of a number of stocks, and decided to buy my very first shares in a company called Cipla Medpro (and what a wild ride it turned out to be - of course the investment videos don’t really prepare you for CEO suspensions, takeover offers and eventual delistings!)

Now it just so happened that I had bought my Cipla Medpro shares a few days before the dividend LDT date. My excitement grew ever larger as I counted down the days until the dividends would appear in my account. And when the day finally arrived, even though it was a whole R45, there was something magical and inspiring about money landing in my account despite not having done much to get it – the very definition of passive income.

To this day, I still get highly excited by dividends (although my stock picking days are now largely behind me, and the dividends are almost entirely from index tacking ETF’s). And since I am still very much in the wealth-building phase of my financial journey, I re-invest any dividends I receive. Man, there is just something awesome about increasing your investments with this "free money".

So naturally I get more than a little upset when I see articles quoting market performance without including dividends. It is of course interesting to note that it is the articles with pessimistic outlooks, doing their best to paint doom and gloom, that conveniently forget about dividends when quoting market performance.  This often leaves me shouting profanities at my computer screen - how dare they ignore one of the best parts about being an investor!

Now you may be wondering why I get so upset, and just how much of an impact the reinvestment of dividends can have? So let’s take a look at some numbers.

The JSE releases monthly data for a selection of indices (you can view their latest release here). Two of these indices are the JSE All Share Index (the cool kids call it the J203) and the JSE All Share Total Return Index (the cooler kids call it the J203 TRI). The J203 is the one that most people quote when looking at the markets performance, while the J203 TRI is basically the performance of the J203, but it assumes all dividends are reinvested.

I have plotted the values of these two indices from mid 2002 until end September 2017 - a little over a 15 year period. (I rebased each index to 1 at the start. Click for a larger image.)

Dividends kick ass!

As you can see, the re-investment of dividends makes a massive difference (especially over long periods of time - such as the chart above). The JSE All Share return is around 420% over this period. Not too shabby, but not even close to the ~720% you would have got by re-investing dividends. That's an extra 300%!

Or, to put it another way, suppose it was possible to invest in the JSE All Share Index and you invested a R1000 back in mid 2002. That investment would be worth R5214 today. By comparison, a similar R1000 investment in the JSE Allshare Total Return Index would be worth R8208!

Now I concede that you can't invest in the J203 TRI directly, and there is of course Dividend Withholding Tax - but I think the results are significant enough that we can agree that you cannot just simply ignore dividends?

I guess what I am saying is always be aware whether quoted returns include or exclude dividends, because they can make a huge difference, especially when compounded over the long term. And if you are in the wealth building phase of your life, don’t forget to reinvest your dividends!

Till next time, Stay Stealthy!
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