Dividend Reinvestment – The Powerful Wealth Creation Machine

Dividend Reinvestment – The Powerful Wealth Creation Machine

One of the most powerful forces in the world is the power of compounding.  When harnessed to create wealth there is no force like it.  As an investor you can choose to receive interest on your money through a bank or invest in great companies and receive a share of their corporate earnings. Below I have highlighted by comparison just how powerful successful investment in the right stocks can be (relative to a cash or a term deposit) when you compound your dividends.  It is possible to achieve incredible results in the long term.  Let me say this again for clarity: in the long term!

 

In our conservative case studies, we show how it’s possible to generate a 1400 plus percent return over a long time frame of 35 years by reinvesting your dividends in a company growing at a conservative rate. Before you choke on your coffee it is worth noting that Warren Buffet was able to grow his investments by an average 20.5% per year and the New York Times reported his overall compounded return in percentage terms at 1,826,163 percent! Its all about patience, ensuring that the companies you invest in and when you invest make good business sense.

 

Dependent on the company as a shareholder you may receive a dividend from your investment, this is a per share distribution of the corporations profits. To maximise the amount of shares you hold of the company your investing in with a Dividend Reinvestment Strategy you will automatically exchange your dividends for more shares at the current price. By reinvesting these dividends into buying more shares you will exponentially increase your holding of the company stock over time.  The first obvious benefit here is that your dividend income from profitable companies could add to your dividend earning power.  The second major benefit for you is the capital growth a great business could create for your portfolio. It is the latter that really packs a punch for your compounding wealth.

 

While a bank account does offer daily compounding returns there is one key difference; The value of your money is being eaten away by inflation every year while the stock can increase in value.  Given the low current interest rates globally you may find your savings are actually losing purchasing power faster than they are growing with interest income.

 

Some some basic case studies below demonstrate the astounding power of compounding dividends, without any ongoing contributions, using the DRIP (Dividend Reinvestment Plan Calculator) available here.

 

Case Study 1:

Dividend Re-investment Term Deposit
Initial Investment $1000 1000
Average Annual Growth 5% 0%
Dividend / Interest 2.85% 2.85%
Time in years 35 35
Outcome 14,083 $2711
Return 1408%

271%

 

Case Study 2 Dividend Re-investment Term Deposit
Initial Investment $10,000 $10,000
Average Annual Growth 5% 0%
Dividend / Interest 2.85% 2.85%
Time in years 35 35
Outcome $140,833 $27,113
Return 1408% 271%

 

Case Study 2 Dividend Re-investment Term Deposit
Initial Investment $100,000 $100,000
Average Annual Growth 5% 0%
Dividend / Interest 2.85% 2.85%
Time in years 35 35
Outcome $1,408,332 $271,113
Return 1408% 271%

 

For these case studies I have used a dividend yield of 2.85% equal to a 15 Year Australian Government Bond as at 28/03/2018 I have used a conservative company growth figure of 5%.  For comparable results I have used a term deposit compounding daily at the interest rate of 2.85%. These case studies do not factor in taxes.

This is general information only and does not constitute financial advice, investment in financial assets can cause losses and should be undertaken at your own risk or after seeking professional advice.

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