A deliberate dividend reinvestment strategy executed with care, prudence and a focus on dividend growth stocks within a diversified portfolio may allow investors to accelerate the mathematical power of compounding investment returns, a process that famed theoretical physicist Albert Einstein called the “eighth wonder of the world.”
Investors who examine the benefits of dividend reinvestment may not look at investing in the same light again. Compound growth represents the growth on growth over time, with the increase for each time period added to the original value before growing again in the next time period. It is a process that creates exponential growth.
We believe dividend reinvestment is a compounding accelerator and that dividend growth stocks should play a key part in a retirement income strategy.
Why is dividend reinvestment a compounding accelerator?
With dividend reinvestment, you can accelerate the power of long-term compounding in your investment and retirement accounts. By methodically plowing dividend income back into high-quality stocks, investors may meaningfully increase their annual returns and total assets.
A hypothetical illustration reveals the powerfully positive impact that reinvesting dividends can make. Let’s go back in time to May 31, 1995 and open two investment accounts ‒ Account A and Account B. In each account, we will deposit $7,700 and purchase 800 shares of Colgate Palmolive at $9.63 per share (on a split-adjusted basis), which offered a 2.13% dividend yield at the time.
In Account A, we’ll take the dividends we earn and put them in our pocket to spend. In Account B, we’ll systematically reinvest our dividend income to buy more shares ‒ using a commission-free dividend reinvestment plan.
Let’s fast-forward to December 31, 2021. What we’ll find is that Account B’s balance dwarfs that of Account A. Account A, in which we pocketed our dividend earnings, grew by an average of 8.55% per year (not bad at all), to end with a balance of $60,572.
Account B however, with steady dividend reinvestment, grew by 11.79% annually (a little more than 2% better average annual compounding), for a much, much larger final balance of $109,940. That’s $49,368 more dollars, an astounding $81.5% more money from just a bit over 2% higher rate of return over just less than 25 years. And all you had to do to get it, was follow a dividend reinvestment strategy!
This is obviously just one example. But the advantage of reinvesting dividends holds up well for a well-diversified portfolio of high quality dividend growth stocks. This is why the cornerstone of our investing strategy capitalizes on this simple but powerful mathematical fact: Dividend Reinvestment is a Compounding Accelerator.
We explore the power of dividend reinvestment in our proprietary research paper, Deliberate Dividend-Growth Investing for Rising Income and Capital Growth.
Dividend Reinvestment is a Compounding Accelerator You Shouldn't Overlook
Percentage-wise, gaining one or two percentage points more of return by reinvesting your dividends may look good, but not necessarily jaw-dropping. But when that difference is compounded over time and translated into dollars, dividend reinvestment starts to look like a spectacular strategy.
Especially in today’s environment of increased stock market volatility and still relatively low fixed-income yields, a dividend reinvestment strategy built with high quality dividend-growth stocks may make a major difference in your ability to accumulate the assets necessary for a comfortable retirement.
While recognizing that dividend reinvestment is a compounding accelerator, building such a strategy involves the ability to research and identify individual stocks and manage them in a properly diversified portfolio. If you would like help implementing a dividend growth strategy in your investment and retirement accounts capitalizing on reinvesting your dividends, we may be able to help.
Tailored Investment Management.
It's just part of what we do.
Source: Intelligent Capitalworks; Bloomberg
Dividend reinvestment, dollar cost averaging and diversification strategies do not assure a profit or protect against losses in declining markets. Dividend amounts change each year and are not guaranteed.