Assume that Cooper owns 100 shares of Johnson & Johnson. The stock currently trades at $64 and pays an annual dividend of $2.28/share. The company's quarterly dividend, therefore, would be $0.57/share ($2.28 divided by 4).
Now assume that Cooper receives his quarterly dividend of $0.57/share. Since he has 100 shares, his total dividend for the quarter would be $57 ($0.57 x 100). If Cooper has not enrolled in Johnson & Johnson's Dividend Reinvestment Plan, then he would receive a check for $57. If, however, he has enrolled, Johnson & Johnson's transfer agent will receive the dividend and use those funds to purchase additional Johnson & Johnson shares for Cooper. In this case, his $57 dividend would purchase .9 additional shares of JNJ ($57 divided by $64).
Cooper would now own 100.9 shares of Johnson & Johnson and next quarter his dividend would be $57.50 which, again, would be reinvested in additional JNJ stock. As you can see, Dividend Reinvestment Plans work a lot like compound interest. Each dividend buys more shares, which lead to higher future dividends and more future shares.
NThe following two charts use actual data for JNJ stock from 2000 through the second quarter of 2011. The first chart shows how reinvesting dividends leads to a larger number of shares owned and a larger number of shares purchased with each dividend the company pays.
The second chart show how, over time, the higher number of shares in JNJ leads to higher total dividend payments.
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