Reinvesting Dividends is
invaluable for your Early
and Rich Retirement!
Once you realise that dividends can go up, year after year after year, and, that reinvesting dividends forms an important part of the overall return of your share portfolio, you start to appreciate what it can do to create sustainable wealth.
Shall I cash them in or reinvest?
It’s a great question, and I have a very definitive answer.
If you are an income investor who really need to use the dividends to live on, right now, by all means cash them in.
However, if you are an Early Retirement Investor who doesn't need the income you should seriously consider reinvesting your dividends in the same solid dividend paying stocks.
I know. It's not groundbreaking:
Dividends are one of the most powerful wealth-building
tools in an investor's arsenal because of the
phenomenon of compounding!
I repeat this once more, by reinvesting your dividends (instead of cashing them in), you buy more shares in the same company, which leads to ever larger dividend payments. These larger dividends payments are then used to buy more shares and so on.
In time, even a relatively small shareholding in dividend paying shares can grow into thousands of shares, generating ever increasing amounts of income.
Take a look at the chart below to see what happens to a £20,000 investment earning a 7% annual yield that's reinvested.
After five years, the investor who cashes in his/her dividends receives £1,400. This doesn't change over time. So, after ten years this investor still receives the same £1,400 (all else being equal).
How different is the situation for the investor who re-invest his/her dividends!
After 10 years, thanks to the power of reinvesting dividends and dividend growth, your investment would be generating £5,299 in annual income -that's a wopping +278.5% more income when compared to an investor who had decided against reinvesting dividends and instead cashed them.
I repeat: reinvesting your dividends in this example generated
278.5% more income when compared to
an investor who didn't reinvest them.
In fact, your £5,299 in annual dividend is now generating an effective yield of 26.5% based on your initial £20,000 investment 10 years earlier.
Don’t you believe me?
Just grab your calculator; type 5299 divide by 20000 and multiply the answer by 100 and you get 26.5 per cent return.
It doesn't take a multi-billionaire like Warren Buffett to see how quickly your income grows when you reinvest your dividends.
Little 'trick' to generate an even higher return
You may not have noticed, but I used a little ‘trick’ to make the entire dividend reinvestment process go a little bit faster.
Take another look at the chart above, and you'll notice that the tallest column (representing the most income) is "cheating" a little.
You see, the tallest culumn represents two already powerful investment concepts into one mega-force. It shows:
- your income, when reinvesting dividends in the same company,
- your shareholding sees 5% annual dividend growth.
It's actually really simple!
Investing in shares -and then reinvesting your dividends - in companies with rising dividend payments puts your dividend growth into overdrive and you are well on your way to an Earlier and Richer Retirement.
So the question now is, where are you going to find this type of high dividend stocks?
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