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Dividend reinvestment: A strategy to boost your income

by , 30 April 2014

Investing in dividends is a great way to generate an income. If you don't immediately need that income, then why not reinvest those dividends? Dividend reinvestment is a great way to boost your shareholding and in turn boost the dividends you receive. Let's take a closer look at how dividend reinvestment works…

Dividends are the secret to long-term investing success

Successful investing for the long-term is down to an income strategy. And that income means investing in dividend paying stocks.

And dividend reinvestment is one way to really boost your returns. This strategy is a safe, steady way to build wealth, the research team at Money Morning US explain.

If you want to reinvest your dividends, speak to your stockbroker. They might be able to do this automatically for you.

What makes dividend reinvestment such an effective way of boosting your returns?

Dividend reinvestment is a way of compounding your cash. It has two major benefits:
  1. You accumulate more shares in the company; and
  2. The value of your shares increases.
The effect of dividend reinvestment is quite amazing. In Elroy Dimson’s book, Triumph of the Optimists: 101 Years of Global Investment Returns, he shows that a portfolio with dividends reinvested generated nearly 85 times the wealth of the same portfolio relying solely on capital gains for growth.

“How I infiltrated this private club reserved for the rich”

Former music teacher reveals 16 secrets to unlock the vaults of the JSE – doubling her investment returns in 3 days…

“When I say this book changed my life… I’m not joking!

Not only did I learn the markets in 3 days and manage to keep my job, I’ve also taken the stock market by storm. I finally understand why investing my money is the right thing to do. And all I want to do now is make sure you get your hands on this book before it’s too late.”

Example of dividend reinvestment at work

Let’s say you buy 200 shares in company Divi Ltd at R90 each, costing you R18,000. The company pays R2.64 a share per year in dividends

If you didn’t reinvest the dividends
The share price stays the same fluctuating about. You receive R1,056 in dividends over two years, but just spend this money. Your position in the stock would still be around R18,000.

If you reinvested the dividends
The share price stays the same, fluctuating about. You reinvest all dividends you receive. This results in you gaining 11 new shares, adding about R1,000 to your position. This example doesn’t include any associated costs that may be due to your broker. This could be even more if the company increased its dividend payment.

So there you have it, how dividend reinvestment is a strategy to boost your income.

Dividend reinvestment: A strategy to boost your income
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