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Top investment strategy: Why it pays to hold onto shares in great companies and reinvest your dividends

by , 18 August 2014

One of Warren Buffett's infamous sayings is: ‘Lethargy bordering on sloth remains the cornerstone of our investment style'. In other words, not doing very much.

If you invest in companies that are at the top of their game and continue to perform, you can practically sit back and watch your investment grow.

It all comes down to investing in great, solid companies and reinvesting your dividends.

Read on to find out the power of this investment strategy…

The difference that doing nothing makes to your investment

Let’s go through this with the help of an example…

Mary and Steven both bought 20 shares in Company ABC on 2 January 1990. Each paid R15,000. They both decided to reinvest any dividends they received.

By opting to reinvest their dividends, Mary and Steven will receive dividends on their dividends. And over time, compounding will help this snowball their investments.

In 1998, Mary decides to sell her holdings just before the share lost money. She banked R150,000.

In 2003, Mary decides to buy back in as the share is showing good value. She spends $73,000 to get back the same number of shares she had before.

By the middle of this year, her investment is now worth R360,000. A 309% profit on her investment.

On the other hand, Steven did nothing over the same time period.

By the middle of this year, his investment is now worth R220,000 (from an initial investment of R15,000). That’s an increase of 1,333%.

The power of reinvesting your dividends

This example shows that although Mary benefitted from selling out of her position at a high and buying back in when shares were trading down, she missed out on five years of reinvesting her dividends.

If you invest in a company for the long-term and it remains to be a strong, capital efficient business, you should welcome a drop in the share price.

A drop in the share price means your dividends will buy even more shares.

That’s the power of doing nothing apart from reinvesting your dividends.

So there you have it, why it pays to hold onto shares in great companies and reinvest your dividends.

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Top investment strategy: Why it pays to hold onto shares in great companies and reinvest your dividends
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