If you don’t need to spend your dividends, don’t spend them.
Reinvest them. Always reinvest them.
And why not?
No great will is required. Reinvesting is painless, but oh-so powerful. It’s so simple, even a logic-challenged poli-sci college sophomore can understand.
Dividend reinvestment allows you to increase the number of shares that you own without adding a dollar of new money. You simply buy new shares with every dividend payment and let the power of compounding work for you.
I’ll demonstrate by way of example.
Let’s assume you buy 1,000 shares of a $10 stock (a $10,000 initial investment). The stock pays a $0.60-per-annual dividend (paid in quarterly allotments of $0.15 per share). That generates a 6% yield. We hold everything constant: We have no dividend growth or share price appreciation. (We’ll assume no income taxes. Yes, it’s a fantasy, like assuming no death, but let’s do it anyway.)
Here’s your wealth standing after 10 years:
Without Dividend Reinvestment (10 Years) | With Dividend Reinvestment (10 Years) | |
Total Wealth | $16,000.00 | $18,140.18 |
Number of Shares Owned | 1,000 | 1,814 |
Dividends Received | $600.00 | $8,140.18 |
Here’s our same assumption after 30 years:
Without Dividend Reinvestment ( 30 Years) | With Dividend Reinvestment (30 Years) | |
Total Wealth | $28,000.00 | $59,693.23 |
Number of Shares Owned | 1,000 | 5,969 |
Dividends Received | $18,000 | $49,693.23 |
After 10 years of dividend reinvesting, you have 13.4% more wealth compared to dividend spending (or whatever).
After 30 years, you have 113.2% more wealth when reinvesting dividends. You have more than doubled your wealth through dividend reinvesting. (Keep in mind, you haven’t added a dime of new money.)
Now, a dividend-growth example.
We’ll assume that the dividend increases 5% annually. As the dividend goes, so frequently goes the share price. We’ll also assume the share price increases 5% annually (on average).
Here’s your wealth standing after 10 years:
Without Dividend Reinvestment (10 Years) | With Dividend Reinvestment (10 Years) | |
Total Wealth | $23,835.68 | $29,341.16 |
Number of Shares Owned | 1,000 | 1,814 |
Dividends Received | $7,546.74 | $29,341.16 |
Here’s our same assumption after 30 years:
Without Dividend Reinvestment ( 30 Years) | With Dividend Reinvestment (30 Years) | |
Total Wealth | $83,082.73 | $252,599.24 |
Number of Shares Owned | 1,000 | 5,844 |
Dividends Received | $39,863.31 | $130,990.60 |
After 10 years of dividend reinvesting in our dividend-growth scenario, you have 23.1% more wealth compared to dividend spending (or whatever).
After 30 years, you have 204% more wealth when reinvesting dividends. You have more than tripled your ending wealth by reinvesting your dividends.
Now, for the spending
After 30 years, your annual dividend per share to start is $2.59 in first year. Had you spent (or whatever) your dividends instead of reinvesting, you’d receive $2,590 the first year. But had you faithfully reinvested your, you’d receive $15,135.96 the first.
You would have nearly six times more annual dividend income to spend had you reinvested your dividends during your accumulation period.
One caveat: The example is grounded in averages. No individual earns the average (unless every data point is the average).
The stock market could fall into a roiling, socialism-promoting recession during your accumulating period. That would be a godsend if the dividend continued to grow. You would accumulate that many more dividend-paying shares that much faster.
Get in gear by getting it on automatic pilot.
Establish a dividend reinvestment program (DRIP) with your broker. Your dividends will be automatically reinvested with no additional input from you. Most brokers provide this service free.
You can also establish a DRIP with the company. The company, though, will often charge fees for establishing the account, reinvesting the dividend, and selling shares. Tracking can also be a hassle because you’ll need to track many accounts.
Regardless of which course, just do it if you can. The sooner you do it, the more income you’ll be guaranteed when you finally want to spend those dividends.
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