Do you have any doubt that investing in shares the best way to maximise your returns? Over the very long term, the stock market has simply hammered other forms of investment, wiping the floor with cash savings and money invested in gilts and other bonds.
A beauty from BT
But what about a concrete example of a recent period? Let’s take a look at what an investment of £10,000 in BT Group (LSE: BT-A) (NYSE: BT.US) 10 years ago would be worth today.
This time in September 2004, BT shares were changing hands at 185p apiece, and today they’ve made it as high as 387p. That’s a 109% gain, and that alone would have turned your £10,000 into £20,920.
What’s more, the period covers the worst recession in recent decades and the accompanying stock market crash, and takes in a period from mid-2007 to early 2009 over which BT shares slumped by a massive 78%! That was a big crunch for sure, but from that bottom the BT price has multiplied five-fold.
Even if you’d bought at the peak in 2007 and sat through the worst and held on, you’d still be ahead today — and if you’d kept on investing in BT every year, you’d be laughing.
Dividends, too
But that £20,920 really is only part of the story, because you’d also have enjoyed a juicy extra reward in the form of dividends. In the early part of the decade, BT was paying annual yields of around 5.5%. Dividends were cut during the credit crunch years, but they’re recovering nicely.
Over the 10 years, you’d have accumulated another £5,550 in dividends, to take your total to £26,470!
But that’s still not the end of the story. You see, if you’d been investing for the long term and hadn’t been looking for annual cash to spend, what would be the obvious thing to do with it? Why, reinvest it in more BT shares, of course!
Dividends reinvested
And reinvesting dividends would have added yet another £6,660 to your pot, doubling the amount you’d have in cash from dividends if you hadn’t reinvested it.
So your grand total after 10 years would come to £33,130 — you’d have more than trebled your initial stake!
But here’s where the big difference really pays off. Without dividend reinvestment you’d have ended up with the same 5,405 shares that your original £10,000 would have bought — but with dividends reinvested you’d have a very tasty total of 8,327 shares heading into the next decade.
Now, we have no idea how the next 10 years will turn out, but something we do know is that you’d be starting out 54% better off than if you hadn’t reinvested your dividends!