How reinvesting your dividends can boost your wealth
Albert Einstein is merited with saying that compounding ‘is the most powerful force in the world' or the ‘eighth wonder of the world'.
When you apply this to reinvesting your dividends, you'll see why compounding is so powerful.
Compounding or compound interest is basically earning interest on interest that you've already received.
When it comes to dividends, it means instead of taking the money you receive as dividends and spending it, you use the money to buy more shares instead.
This grows the number of shares you own. And this grows the amount you receive in dividend payments. If you keep repeating this process over the long-term, you can make a small amount grow into a substantial amount.
And what's great about this strategy is that even if the dividend amount or the share price don't change, you can still make money.
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Reinvesting your dividends would make you R10k richer!
Let’s say you decide to buy 1,000 shares in Company ABC. Its shares are trading at 1,000c each and it pays an annual dividend of 40c a share.
If the company continues to pay the same dividend amount and the share price stays the same for 30 years, you’ll get R400 a year in dividend payments annually. Or R12,000 over 30 years.
And your shares will be worth R10,000. Your total investment value is R22,000 (taking no interest into account in the bank).
If you’d reinvested your dividends and bought more shares of Company ABC instead, you’d be much better off. You’d own 3,232 shares, worth R32,430.
And by the end of 30 years, your dividend payments would be R1,250. That works out at a 12.5% yield on your initial cost (ignoring brokerage costs).
Just remember, the longer you let the power of compounding and reinvesting work, the more wealth you will accumulate.
See you next week.
Josh Benton, Real Wealth