A lot of folks, when they look back at their share price charts, tend to like smooth lines and as little volatility as possible.
But if you invest in dividend-paying companies and you buy new shares each year with the cash, volatility can be your friend — a good dip now and then can help you get more new shares for the same money.
White knuckles
One company that’s provided an exciting ride over the past 10 years is BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US). At the end of September 2004, its shares were trading for around 225p. But they soared to over £5 apiece in late 2008, before plunging back to 250p after the crisis hit and all shares were hammered.
Since then we’ve seen a steady climb back to 472p at the end of September 2014, to more than double your money over a 10-year period. A £10,000 stake invested in BAE shares in 2004 would be worth £20,978 a decade on.
That’s only the share price difference, of course, and BAE has been paying healthy dividends throughout. There was a dip in 2007, but since then the annual payment has been growing strongly again and has been handsomely beating the FTSE 100 average.
In total, you’d have had an extra £7,449 in cash to add to your pot, taking it to £28,427 for an overall gain of 184%!
Now reinvest it!
That, however, assumes you just kept the cash. So what difference would it have made had you bought new BAE shares with it instead?
That’s where the price volatility helps. Whereas you’d have only bought another 156 shares with 2008’s cash due to higher prices that year, by September 2011, when the price was near a recessionary low, you’d have snapped up another 350 of them!
The net result is that you’d have ended the decade with nearly 6,900 shares in the bag where you’d started out with only around 4,400. And as you’d have bought most of your new ones at lower prices than today, your reinvestment would have bagged you an extra £4,015.
In all, your original £10,000 would have turned into a shareholding worth £32,442!
The next ten
What will the next 10 years bring for an investment in BAE Systems? Well, I expect volatility again, if hopefully not anything as drastic as another market crash, and that should enhance our reinvestment strategy. And with the shares trading on a forward P/E of under 12, dropping to 11 a year hence, and with forecast dividend yields of more than 4.5%, I see all the signs of another fat decade.