Reinvesting dividends is the secret sauce of long-term returns from the stock market. And with many companies finding growth hard to come by at the moment, reinvesting dividends could be particularly profitable at this time.
Vodafone (LSE: VOD) (NASDAQ: VOD.US), Rio Tinto (LSE: RIO) (NYSE: RIO.US) and Imperial Tobacco (LSE: IMT) are all focused on generating cash to support progressive dividend policies — even though current revenues are not particularly sparkling.
Vodafone
Vodafone has been a favourite with dividend investors for a good few years. The company announced an annual payout of 11.22p a share with its final results earlier this week, which is a 2% increase on the previous year.
Vodafone is in a phase of heavy investment for the next couple of years. Nevertheless, management reiterated its intention to grow dividends annually, demonstrating “our confidence in strong future cash flow generation”.
The trailing yield at a current share price of 242p is 4.6%, which is comfortably higher than the FTSE 100’s 3.4%. However, Vodafone’s shares have just spiked higher after Liberty Global chairman John Malone spoke about the attractions of a deal, “if we could find a way to work together or combine the companies with respect to western Europe”. As such, it might be worth waiting for a fall-back in Vodafone’s shares, which often happens after the initial jump in these situations.
Rio Tinto
Over-supply and low metals prices have been the prevailing features of the mining industry in the past few years. But, as a low-cost iron ore producer, Rio Tinto is well placed to cope in this environment.
Last year, the company said it would continue to focus on financial and operating discipline, and made “a clear commitment to materially increase cash returns to our shareholders”.
Management delivered on the commitment, hiking the dividend for 2014 by 12% to $2.15 (134.88p) a share. The trailing yield is 4.7% at a current share price of 2,878p. Reinvesting the dividend at a time when the mining sector is at a low ebb — and Rio’s shares depressed — could really boost your returns when the upturn in the cycle comes.
Imperial Tobacco
In contrast to mining, tobacco is one of the least cyclical industries around. Companies in this sector have prodigious cash flows, but never seem to be entirely in fashion — ethical concerns and fears about regulation always keep some investors away — and dividend yields have tend to be pretty decent.
Earlier this month, Imperial announced a 10% increase in its interim dividend, which will be paid in two parts, as the company transitions to paying quarterly dividends. At a current share price of 3,274p, the trailing yield is 4%. That’s a bit less than Vodafone and Rio, but Imperial’s 10% increase in the half-year payout is no flash in the pan. The company has a commitment “to grow dividends by at least 10% per year over the medium term”. Reinvesting dividends should nicely roll-up investors’ long-term returns.