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The Power of Reinvested Dividends - It’s Amazing!
By JLP | May 19, 2008
Had you purchased $10,000 worth of Chevron stock on December 30, 1988 and left it alone, you would have had $75,295 at the end of 2007. That’s an annualized rate of return of 11.21%. Not too shabby.
That’s only part of the story.
Over the years, Chevron would have paid you $22,734 in dividends. Add that to your ending balance of $75,295 and you get a grand total of $98,029, a 12.77% annualized rate of return.
That’s STILL only part of the story.
Look at the table below to see what would have happened had you reinvested those dividends back into Chevron stock.
At the end of last year, the account would have been worth nearly $163,000 (as of today’s close, it would be worth over $180,000). That’s a 15.82% annualized rate of return! Where did the growth come from? Three parts:
1. Capital gains. As I stated in the first sentence of this post, Chevron’s stock has grown an average 11.21% per year over the last nineteen years.
2. Dividend growth. Chevron’s dividend has grown 7.00% annually over the last nineteen years.
3. Compound growth. Reinvesting dividends back into a stock that’s growing and increasing their dividend on a regular basis will really compound growth.
I’m not saying that you should run out and buy Chevron or any stock for that matter. What I am saying is that you shouldn’t underestimate the power of dividends. Fortunately, there are a couple of dividend-focused exchange-traded funds that offer a more diversified approach to dividend investing. Check out iShares Dow Jones Select Dividend Fund (DVY), SPDR S&P Dividend ETF (SDY), and Wisdom Tree. There may be other dividend-focused ETFs and mutual funds out there but these will give you a good place to start looking.
Topics: Investing |