I’ve been looking round some FTSE 100 companies to work out the total rewards investors would have had from them over the past 10 years.
Some, like ARM Holdings which would have multiplied your investment 12-fold, have done supremely well — but there have been some spectacular failures, too.
The banks are the key candidates, so what has Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) done for investors in the past decade? Lloyds was famously saved by a taxpayer bailout in 2008 along with Royal Bank of Scotland, and shareholders might have done a lot worse without that.
Nearly 75% down!
In the event, Lloyds shares have lost 74.5% in 10 years to drop to 75p, so an investment of £10,000 back in 2004 would be worth only £2,550 now.
Now, that’s clearly a dreadful performance, and not one that anyone would have expected from something as traditionally safe as a bank. But you actually wouldn’t have been quite as badly off as that.
That’s because Lloyds was paying dividends before the banking catastrophe hit. There’s been nothing for the past five years, but the first five of the decade would have brought you a total of £2,531 in cash.
Your overall loss would have been a little under 50% to leave you with £5,081. It’s sobering to think that five years of dividend cash would be worth about the same as the remaining value of the shares!
A reinvestment failure
But before you get too excited about having lost only half of your money, I have some bad news for you. Long-term investors will typically not take and spend their dividend cash each year, but instead will reinvest it in new shares. And usually, that’s a winning strategy.
But in this case, you’d only have received dividends when things were going fine and you’d have bought new shares at high prices — and then after the crash when the shares were at rock-bottom and it would have paid you to hoover some up cheaply, you had no dividends to reinvest.
The sad result is that you’d have lost £1,535 of your dividend cash, to take the overall value of your investment back down to £3,545 and a loss of 64.5%.
On what little upside there is, at least you’d be starting the next 10 years with 4,700 Lloyds shares in place of the 3,400 you’d have initially bought, as dividend yields were actually pretty high in the early years of the decade.
Diversify
The real story, of course, is that you need to diversify your investments. If you’d had your cash in, say, 10 shares from different sectors, a 64.5% loss of one-tenth of your cash would be more easily palatable — especially if another tenth had been in ARM Holdings.