Dividend reinvestment plays a huge part of the total return you will receive as an investor. As you can see from the example shown here, just by allowing your dividends to be reinvested your return almost doubles, from over 58% to over 95%.
Dividend yields have been low over the past 10 to 20 years, roughly around 2%, while historically they were approximately 4%. So over the past 10 years if dividend payouts were so low, how do they play such a large role in overall investment returns?
The answer is compounding.
While dividend yields may have been at historic lows, the money you are opting to reinvest is still compounded along with your original investment. As this happens over and over again, year in and year out, your money continues to grow.
While you can see the significance of dividend reinvestment over a short 10-year period, the impact of it over a 20- or 30-year period is even greater. For most people, dividend reinvestment will pay dividends over time.
If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.