Dividend Reinvestment, what exactly does that mean? First, you need to understand what a dividend is. If you need a refresher, please check out Tunaman222’s post called “What is a Dividend?”. So now you understand what a dividend is. The idea of dividend reinvestment will take your portfolio to the next level, and it is self-explanatory.
Simply put, it is reinvesting the dividends you receive back into the shares you currently own. This is a concept that we follow ourselves and can easily be done on trading accounts, such as TDAmeritrade (which we use). Think about it this way…
Own 10 shares at $100 each with a dividend of 2% that is paid once a year.
$100 x .02 = $2 You earn two dollars per share.
10 shares x $2 = $20 Is your total dividends received in a year
If you reinvest the dividends into your stock you will own 10.02 shares or $1020. So the next year passes…
$120 x .02 = $2.4 Per share
10.2 shares x $2.4 = $24 Total dividend
You now have 10.044 shares at $1044.
After two years your account has increased from $1000 to $1044 only from dividend reinvestment. Of course, this does not include the price of the stock fluctuates. Here we kept the stock price at $100 over two years. For comparison, the S&P 500 its self is up 18% in the last year. This is an important concept to grasp for your portfolio. As you reinvest your dividends you will own more shares, and the more stocks you own will equal a more substantial dividend to reinvest; therefore, your account isn’t growing linearly but exponentially. Without dividend reinvestment, your stock fluctuates between time and value ($). Now when you add in dividend reinvestment, you create a third variable that will increase the number of shares you own to return a more significant dividend to reinvest. As long as you pick companies that have a great history of paying out dividends and consecutively increasing their dividend percentage, you will be making more money than you thought possible.