How much might £1,000 invested in Diageo shares pay out in dividends by 2040?
While Diageo (LSE: DGE) might not be a household name despite its massive size, its brands like Guinness and Johnnie Walker are. The long-term success of its premium alcohol business has helped Diageo make sizeable profits over decades. Over the past five years, though, Diageo shares are down by a painful 45% while the FTSE 100 index in which it belongs has moved up 59%.
Still, price movements are only one element of a shareâs return â and I will come back to that below. Another element is dividends.
Diageo until last year was one of only a few FTSE 100 shares to have raised its dividend per share annually for decades.
Last yearâs dividend was flat. I saw that as a potentially ominous sign and not the signal of management confidence I was hoping for.
While the share price decline has been painful, it has at least helped push the dividend yield up to 4.8%. That compares very favourably to 2.9% for the FTSE 100 right now.
Long-term growth adds up
Annual increases like we have typically seen from Diageo can help build significant wealth for shareholders over time.
But, as last year proved, they are not guaranteed. Indeed, with demand for premium drinks falling in some key markets, there is a risk that Diageo will cut its dividend at some point.
So, let me paint three possible scenarios for £1,000 invested today.
One is that the dividend remains flat. With a 4.8% yield, that could still make for juicy long-term returns. That could be around £720 of dividends between now and the end of 2040.
A second scenario would be a return to dividend growth, of around 4% annually. Diageo managed this in quite a few years recently, so I see it as realistic.
In that case, someone buying today would be eyeing a prospective yield of 8.3% between now and 2040. £1,000 invested today ought to generate around £962 dividends by the end of 2040.
Could the dividend be cut?
But what if the company decides to slash its dividend to make it more sustainable? For example, what if it cuts it by a third this year and then grows it by 4% annually?
The company has not announced any such intentions. But such a cut is somewhat like what Imperial Brands did in 2020. The dividend growth after Imperial’s one-third cut was lower at first, but is now 4.5%.
Like Diageo, cigarette maker Imperial was wrestling with a high dividend cost while battling declining consumer demand.
In such a scenario, £1,000 invested today ought to earn around £641 by the end of 2040.
Ironically, a dividend cut can help a share price if investors think it makes a companyâs finances more sustainable.
Imperialâs share price is up 115% over five years: stark contrast to whatâs happened to Diageo shares!
Hereâs my take
I reckon Diageo can afford ongoing dividend growth and I plan to hang onto my shares.
It is highly profitable and owns a unique collection of premium brands that give it pricing power. It also has a strong global distribution system.
Still, Diageo shares have tumbled for a reason and I do see a dividend cut as a real risk. I hope it will not happen but, as an investor, I recognise it could.
The post How much might £1,000 invested in Diageo shares pay out in dividends by 2040? appeared first on The Motley Fool UK.
Should you invest £1,000 in Diageo plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo plc made the list?
More reading
- A simple 3-step plan for targeting a £1,000 monthly second income
- Diageo shares have fallen a long way â is the pain over?
- Down 9% in 10 years, could this FTSE 100 stock be a once-in-a-decade buying opportunity?
- The Diageo share price: a once-in-a-decade chance to get richer?
- Diageo shares: a once-in-a-generation chance to get rich?
C Ruane has positions in Diageo Plc. The Motley Fool UK has recommended Diageo Plc and Imperial Brands Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
