One of the best ways to increase your net worth and build wealth is to invest in stocks that pay dividends. Like compound interest, dividend stocks can help increase your wealth exponentially when given time to grow. This is because they not only give you the opportunity to make money through capital appreciation, but they also provide income through regular dividend payments. That makes them one of the best passive investments you can make as the dividends will continue to roll in without you doing anything.
When you’re just starting out, the dividend payments may not seem like much. But you don’t necessarily have to take them in the form of cash. Instead, you can reinvest your dividends to buy more shares. Those new shares will start earning new dividends themselves and on and on the cycle continues. Before long you could have more shares purchased through dividend re-investments than through your original investment.
For example, let’s say you buy 100 shares of ABC Company at a price of $10 per share for a total investment of $1,000. ABC pays a quarterly dividend of twenty cents per share. If you cash the money out you’ll receive a check for $20 per quarter. But if you reinvest the dividends, you can buy more shares of ABC, and those new shares will start earning their own dividends each quarter.
Here’s a quick example of how stocks that pay dividends can multiply like rabbits if you reinvest the dividends:
Notice how after 5 years your total account value has risen by almost 50% even though the stock price has remained the same (this is a just a simple example, obviously the stock price would fluctuate in the real world). Instead of 100 shares you have 145.6811, even though you haven’t invested another dime outside of the dividends. Just imagine how much it would grow if the stock price also increased and you let it go for 20, 30, or 40 years!
And that’s not all. In the example above, ABC Company kept their dividend at eighty cents per year per share and the size of your account still grew like a weed. But you can do even better than that by investing in a company that actually increases their dividend payout year after year. This is where you get truly exponential growth. Investing in a high quality company whose stock price appreciates over time and who not only pays out regular dividends but consistently increases them is a foolproof way to build wealth.
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{ 10 comments… read them below or add one }
I’m pretty new to investing, so this is a great post to help me! Thanks.
Michelle @ Making Sense of Cents´s last [type] ..January Goals
The effects of compound interest continue to amaze me. Seeing a 50% increase in 5 years simply by reinvesting dividends is powerful stuff.
cashflowmantra´s last [type] ..How To Make $1000 Per Month as a Blogger
I started investing more aggressively in dividend stocks last year, and I enjoy watching those dividends reinvest!
Kris @ Everyday Tips´s last [type] ..What I Learned From A Long Break
Dividends do have a huge advantage! The chart helps to illustrate the practicality of it too.
Corey @ Passive Income to Retire´s last [type] ..Is it Possible to Retire on Rental Properties?
High quality, growing companies (with consistent equity and dividend growth) don’t pay 8% yield though – they pay 2%. Maybe 4% if you find a bargain. 8% yield (roughly 500 basis points above zero-risk rate ) is going to be associated with some very substantial risks of some sort.
W-at-Off-Road-Finance´s last [type] ..In Defense of Technical Trading
Fair enough…I just picked that figure as an example, but 8% is a bit high.
this is all still cyrillic to me.
frugalportland´s last [type] ..Frugal Fun: Shopping at Goodwill
To play devil’s advocate a little, do you see it as a problem that these dividends will generate a tax burden during your accumulation years? I don’t think anyone would argue the merit of dividend stocks during retirement, but I don’t know how the math works out over 20-30 years of annual taxes on these dividends as you’re trying to grow your portfolio.
lifeoverwork´s last [type] ..Using Groupon to your advantage
That’s a good point, you do need to consider the tax consequences of dividends. But if you’re planning on re-investing the dividends in new shares you can do so within a tax-advantaged account such as an IRA.
Certainly. If we’re talking about tax-sheltered accounts like IRAs, investing in dividend stocks is a good strategy. Unfortunately, you’re very limited in how much you can contribute to these types of accounts each year.
lifeoverwork´s last [type] ..Why do we assume that “future us” will be much different than “present us”?
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