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How to snowball your investment with dividend paying shares

by , 09 January 2015

If you're an income seeker, you no doubt have some dividend paying shares in your portfolio.

But did you know that you can make these dividends work for you? You can use your dividends to grow your investment amount.

It all comes down to compounding.

So what is compounding? And how can you use compounding to grow your investment?

Read on to find out…

What is compounding?

Compounding is the process of earnings interest on interest that you’ve already been paid.

For example, you have money in a savings account. Each month the bank pays you interest on that amount. If you don’t withdraw any money from the account, this amount grows as the amount of interest you earn also grows.

Compounding has a snowball effect on your money. And the good news is you can benefit from the wonders of compounding with your dividend paying shares.

Using compounding with your dividend paying shares

Instead of spending the dividends you receive, you could buy more shares with the money. This results in you receiving more dividends.

If you keep repeating this process, the longer the better, you can turn a small initial amount into a large one. And the good news is this works even if the company’s share price doesn’t rise or the dividend payment remains the same.

Let’s have a look at how this works with the help of an example…

You buy 1,000 shares in Company ABC at R100 a share. When you buy the shares, the company pays a dividend of R4 a share.

Over the next 30-years, the share price of Company ABC stays the same and the dividend also remains the same. This is unlikely, but let’s assume this for our example.

If you held onto the shares for that length of time, you’d receive R4,000 (1,000 x R4) a year or R120,000 over 30 years.

Your shares are still worth R100,000, so your investment value would be R220,000.

But if you decided to reinvest the dividends to buy more shares, you’d end up owning 3,243 shares worth R324,300 and receive an annual dividend income of R12,500 (excluding fees).

So there you have it, how to snowball your investment with dividend paying shares.

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How to snowball your investment with dividend paying shares
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