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Written by: Gary Ashton
Value investing was all the rage before the Great Financial Crisis of 2007 because buying shares cheaper than the rest of the market tended to lead to more significant outperformance. However, after the financial crisis, cheap stocks have lagged the market, and investors have tended to favor more expensive growth stocks – those that deliver faster sales growth.
Growth stocks, however, tend to reinvest their earnings back into the business, precisely because it is growing. These companies use their free cash flow to expand product lines, open new outlets, and hire workers. These investments leave little, if any, cash available to pay out to shareholders as a dividend. Does this matter? Should investors care about being paid a dividend? When most people think about the return on a stock, they focus on the capital gain or loss – the increase or decrease in the price – and pay little if any attention to the cash flow that a stock can throw off while an investor holds it.
Total Return Matters
Of course, dividends do matter and can significantly enhance an investment return – known as the total return on investment. A stock can suffer a capital loss – when the price goes down after purchase – but still, deliver a positive return because of the dividend. The total return is an essential part of investing, and investors should not overlook it.
To help investors better analyze the benefit of a dividend and the possibility to use dividend proceeds to reinvest in the stock, Finscreener.com recently launched its Dividend Reinvestment Calculator. This calculator allows users to see how an investment would perform both with and without dividend reinvestment. All fields can be overwritten, but several come with pre-populated data from Finscreener.com. Required information from the user includes the ticker, the number of years the investment is held, and how many shares the investor hold at the outset. After that, the calculator shows how the investment is expected to perform with and without using dividend proceeds to reinvest in the stock.
A user can use almost any company’s ticker as the initial input. It is possible to see that reinvesting dividends has a positive effect on an investment return. Dividends are used to purchase more shares, which in later years, also pay a dividend. If the share price rises, investors also benefit from appreciating additional shares purchased with dividend proceeds.
Finscreener.com clients should try the calculator for themselves. Try inputting your favorite tickers and experiment with different holding periods. You can also put in your assumptions for other inputs and see how they affect the investment performance.
Related: Is It Time To Invest in Gold Stocks?
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