Investors should keep an eye on the very long term

Over extended periods, dividends, dividend growth, and compounding can produce investment returns that most people wouldn't think possible.

By MoneyShow.com Jul 3, 2013 12:53PM

Rob Casey, Brand X, Getty ImagesBy John Heinzl, Globe Investor


In a column two weeks ago, I examined the long-term financial returns of owning a cottage versus investing in Royal Bank of Canada (RY) shares.


The analysis revealed that the cottage in question -- which a reader purchased in the mid-1970s for $26,000, and which today is valued at approximately $250,000 -- had an annual return of about 3% after taking into account renovation expenses, maintenance costs, and property taxes.


That paled next to an investment in Royal Bank shares, which -- assuming all dividends were reinvested -- would have grown to more than $1.2 million from March 31, 1975, to the end of 2012, for an annual return of 10.8%.


At least that's what I thought. But as a sharp-eyed reader pointed out, the analysis vastly underreported the actual return in Royal Bank's stock.


It turns out that Bloomberg, which was the source of my data, included just three stock splits for Royal Bank over the 37.75-year period. In fact, the shares split four times.


When I contacted Bloomberg and had them correct the data, the picture changed dramatically: Royal Bank's total return, including dividends, jumped to 12.9% annually, and the initial investment of $26,000 soared to more than $2.5 million.


But even that number may not be high enough. The reader, who wishes to remain anonymous, sent me a detailed spreadsheet documenting every dividend Royal Bank has paid since March 1975, and tracking the growth of the initial $26,000 assuming each dividend was reinvested in additional shares.


Assuming the reader's calculations are correct, the Royal Bank investment would have soared to nearly $4.5 million by the end of 2012. I could not verify all of the data in the spreadsheet, but I randomly checked many of the numbers, and they were accurate.


Granted, an investor would have had to pay taxes on every dividend received, but even assuming a 20% tax rate on dividends, the total would be a still-impressive $3.2 million -- equivalent to an annual return of 13.6% (before capital gains taxes).


What about inflation, you ask? Well, the consumer price index rose at an average annual rate of just under 4% over the period, according to the Bank of Canada's website, so the shares produced an annual gain of more than 9% in real terms, which is still spectacular.


Curious to see whether other banks posted similar returns, I used the investment calculator available on Toronto-Dominion Bank's (TD) website.


Over the period in question, a $26,000 investment in TD Bank shares would have increased to about $5.4 million -- a growth rate of more than 15% annually, which is slightly higher than Royal Bank's gross return.


The message here isn't that you shouldn't buy a cottage. Cottages produce their own rewards -- family time, relaxation, memories -- that can't be measured in dollars and cents.


The message is that, over long periods, dividends, dividend growth, and compounding can produce investment returns that most people wouldn't think possible. It's worth pointing out that the years from 1975 through 2012 included recessions, bear markets, financial crises, wars, and periods of high interest rates and inflation.


Keep that in mind if you're feeling rattled by this week's market volatility.


Read more from John Heinzl and Globe Investor here.


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6Comments
Jul 4, 2013 1:53PM
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The point of the article is correct.  I had a similar experience with Exxon.  I invested $300 in 1981, when I got my first full time job.  I also invested in some utility stocks.  Not exactly sexy moves, but I felt they were solid.  Exxon (now ExxonMobil) is today worth over $23,000, average annual return of over 13%, without investing another cent, except for reinvested dividends.  The utilities didn't do quite as well, only growing at an average annual return of between 6 and 7%, still over twice as much as the cottage mentioned in the article and beating inflation.  Over the past 5 years (starting before the big September '08 melt-down) my average annual return is about 7%.  Admittedly, that's partly because I never stopped investing and went in big in the summer of '09.  But that's the lesson.  Ignore short-term events, as markets ALWAYS over-react in the short term to all news, whether good or bad.  The lesson is make sure you are investing and watch your allocations.  At some point I may change my handle to Boglehead unless that's already taken.
Jul 3, 2013 1:39PM
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please don't cherry pic stocks to prove a (valid) point. 

 

buy and hold makes sense.  however one should buy and hold thru a cluster of a market segment.  not just one stock. 

 

to track just one stock begs someone to cherry pic simply another "one stock" that went trash. 

Jul 3, 2013 3:57PM
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Nice cherry picking but my parents bought a home in Palos Verdes, CA in 1964 for $17,500 and today it's worth $1,000,100 and they saved $500,000 in rent by owning that home for 50 years. I wouldn't say one investment is necessarily better than another just a different solution to different problems. What if you'd invested in Enron or Microsoft?
Jul 4, 2013 5:28PM
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I'm sure the handle Boglehead or Bobblehead, might be available to some of us..

But I think some of the Forums Morons should have a lock on it, first..

 

I see nothing wrong with your form of investing...

Everyone wants to make the big hits of 20-25% gain....Those normally come with high risk associated with the premise..

7-12% gains can go a long ways to build a future, and many do not realize the method of compounding?

Allocations, re-investing or DRIP plans can build a small fortune, not accounting for periodic additions to a portfolio.

Others worry about owning a Homeplace, hundreds of opinions and what it cost in the long run..

My premise would be keeping up with inflation, having a nice place to live and breaking even if necessary, with the possibility of passing something on to your children that's debt free.

Reverse Mortages are the scourage of the Elders that had little of anything else;

And are the work of Shysters...Try to not let yourself be caught in that trap.

Jul 4, 2013 3:10PM
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It's been said in the long run we are all dead.

As we all keep trying to delay that, the advice above is good.

If nothing else, you can end up leaving something for the kids to blow in Vegas.

 

Jul 3, 2013 5:26PM
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