Reuse, Recycle, Reinvest
One way to generate long term wealth is to reinvest your dividends back into the security that is generating them. As an example, the S&P 500 index has, over time, generated a dividend of about 1.8%.
The return on the S&P 500 index over the last 10 years was approximately 12.5% per year. However, with dividends reinvested, the average annual return was 14.7%. Reinvesting dividends increased the average annual return by a whopping 19%.
That’s an index. Here’s an example of how dramatic dividend reinvestment can be with individual stocks. Let’s say you bought 100 shares of Boeing (NYSE: BA) in April of 2008 for $8,300. The November 2008 quarterly dividend was $0.40 per share, which, if reinvested into Boeing stock, would have bought you another share.*
Fast forward to today with Boeing stock trading at about $372, which means your return on the single share purchased by the dividend reinvestment would be 786%.
Over time, with gradually rising share prices and growing dividends, investors who have the luxury of reinvesting their dividends and the patience to weather the ups and downs of the market could see spectacular results.
David R. Evanson is a financial journalist in Philadelphia.
* Anonymous, (November, 2019). S&P 500 Return Calculator, with Dividend Reinvestment. DQYDJ. Retrieved November, 2019