Here is a semi-realistic example of what happens when you start dividend investing: once you start, your assets grow without your needing to do anything else.
The example show what happens when you buy 50 shares of a stock at $50.00 each for a total of $2,500.00. In these examples, we show what happens based on the amount of dividends.
For purposes of this example, we assume:
(1) Stock price never changes, stays at $50.00. This is not a realistic event, as stock prices vary all the time. But we keep the price at $50.00 in these examples to eliminate the variability that occurs in results when the price changes.
(2) We show three examples. In the first example, the dividend stays constant. In the second example the dividend increases 2% per year. In the third example, the dividend increases 3% per year. Any of these events could happen. Some companies increase their dividends, some do not. The amount a company may increase its dividend is rarely stable.
Example of dividend reinvestment starting at 2% yield with no dividend increases.
You must have dividend reinvestment to show the results shown.
The second example shows dividend reinvestment on a stock with a 2% yield and a 2% annual dividend increase.
And finally, the third example shows dividend reinvestment on a stock with a 3% yield and a 3% annual dividend increase.
As you can see in the charts, if you purchase the 50 shares, as shown in the chart in “Quarter zero”, for $2,500.00, and never do anything else, as long as you have dividend reinvestment, you will accumulate growing dividends that purchase more shares each quarter as time goes by. As a result, your wealth grows.
What Are Realistic Dividends?
I chose to show examples of 2%, 3% and zero percent increase in these examples to illustrate the possibilities. But these are simply examples, not actual historical results. What is real?
From Investopedia: “During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 45 separate years over the period. Of the 30 years after 1960, only five saw yields below 3%. The sharp change in S&P 500 dividend yield traces back to the early to mid-1990s. For example, the average dividend yield between 1970 and 1990 was 4.03%. It declined to 1.90% between 1991 and 2007. After a brief climb to 3.11% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.97% between 2009 and 2019.”
How High The Sky?
As we can see, dividends are higher than interest rates at average savings accounts. The dividends could seem to rival bank money market account interest rates at least initially, but at current rates, dividends grow much faster. Plus, bank money market account do not also include potential equity growth.
What Else Changes?
As mentioned above, the stock price in these examples is kept stable at $50.00 for sake of simplicity. But in reality, stock prices vary all the time. As we have previously mentioned, for dividend reinvesting, when a stock price declines dividends purchase more shares, when the price increases dividends purchase less shares.
One of the benefits (to me) of dividend investing is the ability (for me) to not need to think about my investments all the time. When I purchase some shares and set the account to reinvest dividends, I let the dividends reinvest and leave it on auto-pilot. I do not need to worry about price declines, especially since I know that lower prices mean my dividends buy more shares. I don’t need to think about selling when prices decline because my goals is to accumulate dividends not sell for a higher price.
Of course, I would like the companies in which I invest to prosper and do well. Without succeeding, no company will pay dividends. But I don’t let the entire world of what goes in the those companies’ business consume my life. I pay attention somewhat, but that is enough. I do some dollar cost averaging monthly, I check my investments quarterly, update my spreadsheet when a company pays their dividend, and that’s about it. (You can get a free copy of my spreadsheet from this post.)
What is the Real Goal?
While it is nice to get and have money, to be prosperous and to have an increasing net worth, but that is not the real goal. The real goal is peace of mind. By arriving at a situation where I do not need to worry about money, I am that much closer to my real goal.
What is your dividend reinvesting experience? Let me know here.
The illustration of a comet is one of a series from 1587 by an unknown author in a hand-lettered book entitled Kometenbuch (Comet Book), subtitled (in translation) “Comets and their General and Particular Meanings, According to Ptolomeé, Albumasar, Haly, Aliquind and other Astrologers.” It is currently in Universitätsbibliothek Kassel (Kassel University Library, Kassel Germany). License: Attribution-ShareAlike 4.0 International (CC BY-SA 4.0).