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.