LONDON -- Some of the biggest companies in the FTSE 100 run schemes where investors can take dividends in the form of new shares instead of cash. This is known as a Dividend Reinvestment Plan (DRIP), or "scrip" dividends.
If the company in question pays a large and increasing dividend, such reinvestment can quickly compound the size of your shareholding higher.
Using dividend data on Sainsbury , you can see how the income produced by this family favorite has made dedicated shareholders richer.
Dividend per Share (pence)
Shares Purchased by DRIP Scheme
*Adjusted for share consolidation.
My figures are based on someone who owned 1,000 Sainsbury shares 10 years ago. Here is how dividend reinvestment has rewarded the company's investors.
Just over 10 years ago, shares in Sainsbury's were around 329 pence each. If an investor bought 1,000 shares and kept on reinvesting the dividends, that shareholding would have grown to 1,291 shares today. So, an outlay of 3,290 pounds in 2002 would now be worth 4,351 pounds.
The total return is even better than that. In 2004, Sainsbury's distributed 35 pence per share to its shareholders. This followed the disposal of its U.S. supermarkets business. This was essentially a 10.6% special dividend to the hypothetical investor who had bought at 329 pence two years earlier. The shares were then consolidated 7:8.
The disposal of the U.S. operations preceded a disappointing period for dividend reinvestors. The Sainsbury's payout was cut and the share price took off. This meant that the dividend stream was now buying back far fewer shares.
The financial crisis reversed this trend. In one year, the Sainsbury's share price halved. Yet Sainsbury was rapidly increasing shareholder dividends. The effect was a dramatic ratcheting upward of the number of shares that could be purchased using dividend cash flows.
Sainsbury's dividend has been increasing year on year since 2005. This has been thanks to 31 successive quarters of sales growth at the company. In the last five years, that dividend has been increased at an average of 10.7% a year.
Sainsbury's shares are now expected to yield 4.9% for 2013. This means that a 3,290 pound investment in 2002 could now yield 213 pounds for the year. Another 6.1% dividend increase is expected for 2014, increasing the compounding effect of the DRIP further.
Sainsbury's perhaps looks like more of a buy now than at any point in the last 10 years. The business has real momentum. The dividend yield is high and rising. A forward price-to-earnings ratio of 11.5 is far less than the market average, and two years of growth are forecast.
If you are interested in harnessing the power of income shares, then check out what Neil Woodford has been buying. This man has spent decades delivering huge returns to his investors by carefully selecting top income shares. Learn from one of the best in the business here with the free Motley Fool report "8 Shares Held by Britain's Super Investor." To get the report delivered to your inbox immediately, click here.
The article Is Sainsbury a DRIP Share for the Long Term? originally appeared on Fool.com.
David O'Hara does not own shares in Sainsbury. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.