Dividend Reinvestment

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.

Image result for dividend reinvestment

Categories: Investments

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Interested in developing your financial literacy and want to learn how to set yourself up for your future?

Are you interested in SPACs?

Well, subscribe here for FREE to receive emails about new content to boost your portfolio & set your path to Financial Freedom!

You have successfully subscribed to the blog you will receive a email shorty to confirm your subscription!

There was an error while trying to send your request. Please try again.

Financial Freedom 101 will use the information you provide on this form to be in touch with you and to provide updates and marketing.
%d bloggers like this: