As seen in

Dividend Reinvestment & Compound Interest

Their combined power must be recognized & appreciated.

Why reroute dividends back into your investments? Isn’t taking the income the preferred outcome when a dividend is produced?

Retirees and pre-retirees are eager for dividend income in this era of historically low interest rates. Even so, the choice to buy more shares has merit for the long run.

Reinvestment & compounding may have profoundly positive effects. As a hypothetical example, let’s say you own 100 shares of a stock with a $10 share price. For the sake of mathematical convenience, let’s say that this stock maintains that share price while providing you with a 3% annual dividend. That 3% payment breaks down to a 0.75% quarterly dividend ($7.50 per quarter going to you). You choose to reinvest these payouts, buying more shares each quarter. So after one quarter, you own 100.75 shares of that stock (valued at $1,007.50), and a year later, you own 103.034 shares (valued at $1,030.34). Your annual yield effectively improved from 3% to 3.34%.1

That’s after one year. The big picture, even with such a simple example, is easily grasped here. While past performance is no indicator of future results, some recent stock market history illuminates the power of dividend reinvestment and compounding further.

Bears reference the “lost decade” of the 2000s, but dividend trends from that era certainly put stock market investing in a more positive light. Even with the 2000-02 bear market and 2008 downturn, S&P 500 firms increased their dividends by an average of 5.46% in a 10-year stretch that witnessed both those market setbacks. In the same ten-year period, DJIA companies boosted their dividends by an average of 7.07% per year, while NASDAQ firms bumped up theirs by an annual average of 45.38%! If an investor put $100,000 into a hypothetical investment that performed similarly to the DJIA on January 1, 2000, simple price appreciation would have taken its value north to more than $105,000 by January 1, 2012. Yet across the same 12 market years, that hypothetical $100,000 invested with dividends would have grown to approximately $141,000 by the start of 2012.2

Over 80% of S&P 500 firms pay dividends. In September 2013, 83% of stocks in the index were issuing dividend payments – the most in 15 years – with dividends from 99 firms at 3% or better. Some firms paid them out even as they lost money.3,4

Keep investing consistently, with compounding & reinvestment in mind. It may make a huge financial difference for you over time – a difference that might even let you retire earlier instead of later.

Mark Lund is an Independent Investment Advisor, Investor Coach and author of The Effective Investor. Mark has written articles for or been quoted in The Wall Street Journal, The Salt Lake Tribune, The Enterprise Newspaper to name a few. To get a free report, “9 Investing Mistakes To Avoid” go StonecreekWealth.com Investment advisory services through Stonecreek Wealth Advisors, Inc. a Registered Investment Adviser firm in Utah.

Citations.
1 – beta.fool.com/cacody/2012/09/02/compound-interest-the-8th-wonder-of-the-world/10945/ [9/2/13]
2 – tinyurl.com/pftknyj [3/26/13]
3 – factset.com/dividend [9/16/13]
4 – 247wallst.com/special-report/2013/10/02/the-highest-yielding-dividends-that-are-safe-to-hold/ [10/2/13]
5 – consumerreports.org/cro/money/personal-investing/drip-your-way-to-growth/overview/index.htm [10/11]
6 – hughchou.org/calc/drip.php [10/17/13]

All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund an independent fee-only Investment Advisor, Investor Coach and the author of The Effective Investor. Located in Salt Lake City and Provo Utah.

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