Dividend Reinvestment in Action
Not that you asked, but compounding growth can pay off
Dividend reinvestment is when a stock, ETF, or mutual fund, pays a dividend and those funds are immediately used to purchase the same asset. It is an investment strategy to help boost returns.
Articles that showcase the benefits of dividend reinvestment might show a chart like the one above. That is showing a hypothetical $100,000 invested in Walmart three years ago, and the results of re-investing any dividends, plus appreciation of share price. The article might even mentioned it is a 19.5% compound annual growth rate (CAGR).
Perhaps there will be no chart, and the article will point out that if you invest $10,000 dollars at 8% interest (dividends plus share price growth) the $10,000 will grow to $21,589 in 10 years. If the article is math oriented, it might show the calculation:
(1.08)¹⁰ x $10,000 = $21,589
Or, they will explain the math, noting that $100 at 5% will turn into $105 after one year, $110.25 after two years, $115.76 after three years, and so forth.
The math and intent are correct, but they tend to show a theoretical investment: if you had invested $100,000 in Walmart three years ago, then this would happen.
The below is also theory, for you, but they are actual investments. It also shows the mechanics and results of reinvesting dividends to buy additional shares. And how those shares increase dividend payouts, resulting in more shares being bought on the next dividend payout.
The first use case is a stock shows one year of dividend reinvestments, and the the second stock is more than five years of dividend reinvestments.
Disclaimer and Notes
- While dividend reinvestment is a much touted investment approach with clear benefits, choosing to reinvest dividends is a personal decision which you make for yourself
- The stocks listed below are not recommendations; they are identified for context. Investing in any asset is a personal decision which you make for yourself
- Stock prices go up, they go down. Reinvesting dividends is no guarantee that an asset will grow. Any investment in stocks can lose money. Consider a stop loss or trailing stop for asset protection
- This is not a prediction of future results; this is showcasing actual dividend reinvestment growth
- This does not touch upon formal DRIPs
KO — Coca-Cola Company
Coca-Cola has increased dividends for 59 years and is a dividend aristocrat. Those are companies which have raised dividends for a minimum of 25 consecutive years. This is not an endorsement or recommendation of Coca-Cola.
How to read this
• On June 22, 100 shares of Coca Cola were bought for a total of $4,556
• A dividend of $40.98 was paid on October 2, and with the stock at $48.9581, .0837 shares were bought
• A dividend of $41.33 was paid on December 16, and with the stock at $53.5382, .772 shares were bought
• A dividend of $42.66 was paid on April 5, and with the stock $53.1216, .803 shares were bought
• A dividend of $43.01 was paid on July 2, and with the stock at $54.3427, .07915 shares were bought
The total outlay is $4,566, and the dividends to date is $168.03.
The aggregated cost per share is $44.2411. That is calculated by the total cash paid ÷ total shares ($4,565.88 ÷ 103.2044).
Things to note
• Each time a dividend is paid, it is paid upon the cumulative number of shares owned: 100 shares, then 100.837, then 101.609, then 102.412
• The dividends paid in October and December were $.41 per share
• The dividends paid in April and July were $.42 per share
The compounding can be twofold: increasing the number of shares and the increasing dividends paid per share.
While the overall return for the year was roughly 22%, dividend reinvesting increased the current value by .12%. That is not very impressive.
One year is a short haul. The next one is a longer haul.
ABR — Arbor Realty Trust REIT
Arbor Realty Trust is a real estate investment trust (REIT). To simplify, these trusts invest in physical properties (hospitals, houses, warehouses, et cetera). REITs must pay a minimum of 90% taxable income as dividends each year. This is not an endorsement or recommendation of Arbor Realty Trust.
How to read this
• Similar to the Coca Cola grid, dividends are reinvested when received
• The green highlighted date in January 2019 was a special dividend, which companies sometimes provide
Things to note
• The dividends have increased over time from $.15 to $.34 quarterly
• ABR had a large drop in price in March 2020, as did a lot of stocks due to the pandemic — this resulted in a large increase in the number of shares bought compared to the prior dividend payouts
• Total dividend payouts to date ($3,716) is greater than the total cash invested ($3,418)
The main call out, though, is that the number of shares purchased with each dividend payout is not linear. Stock prices go up and down, the dividends paid can change, and those factors combined will change the number of shares purchased on each payout.
As noted, compounding can be twofold. The number of shares grew from 500 to 850+, and the dividends have grown from $.15 per to $.34 per share on a quarterly basis. The quarterly dividend payout went from $75 to $286. That is the magic of compound investing.
Returns were 31% better by reinvesting, compared to not reinvesting and holding the dividends. Of course, those dividends could have been invested elsewhere with perhaps a better outcome.
But a 31% gain in returns, no one is mad at that.
Whether to reinvest dividends or not is a personal choice. Perhaps the dividends are needed to pay a bill. Perhaps you don’t want too much invested in one stock. Perhaps you need to pay taxes on these dividends. Whatever the reason, it is your call.
However, compounding via dividend reinvestments can improve your returns.
Or as Benjamin Franklin would say:
Money makes money. And the money that money makes, makes money
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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.