\u201cA penny saved is two pence clear,\u201d<\/a> meaning for every penny we don\u2019t spend, we\u2019re twice as rich.\u00a0<\/p>\nYou can think of investment income\u2014such as dividends or capital gains\u2014in a similar way: If you don\u2019t immediately need income, you have two options\u2026 You can save the dividend payout\u2026 or, better yet, invest it.\u00a0<\/p>\n
Reinvesting dividends is one great\u2014and very simple\u2014way to grow your wealth.\u00a0<\/p>\n
Today, we\u2019ll go over how this method works\u2026 and share a few details that can make a big difference in the final outcome.\u00a0<\/p>\n
Let\u2019s start with the most important reason to consider dividend reinvestment: compounding.\u00a0<\/p>\n
Compounding is the process of crediting the interest (or dividends) from an asset back to the same asset.\u00a0<\/p>\n
If you reinvest dividends each time you get them, you put more money into the stock\u2026 and create a slightly larger position. The next time the dividend is due, you\u2019ll get a slightly higher payout. Repeat for as long as you don\u2019t need income\u2014or for as long as you are willing to hold the stock\u2014and your position will grow faster and faster, without much effort on your part.<\/p>\n
Eventually, the value of your portfolio will accelerate at an astonishing rate\u2026\u00a0<\/p>\n
Let\u2019s look at an example: Say you own 100 shares of a fake company that we\u2019ll call Acme, which is currently trading for $100 per share.\u00a0<\/p>\n
Let\u2019s also say that the stock pays $1 per share in quarterly dividends\u2026 or $100 in income on your 100 shares every three months.<\/p>\n
But you don\u2019t need this income\u2026 so you opt to reinvest these dividends. This means you can buy one additional share.\u00a0<\/p>\n
Now you own 101 shares\u2026 which means next quarter, you get $101 in dividends.\u00a0<\/p>\n
If, when the next quarter-end comes around, the stock has declined to $90 per share, reinvesting this new dividend at $90 per share will buy you an additional 1.123 shares\u2026 and brings the number of shares you own to 102.123. Your third quarterly dividend will be $102.123\u2026 and you can reinvest it again.<\/p>\n
And so on.<\/p>\n
The more frequently you reinvest dividends, the faster your income (and final returns) will grow.\u00a0<\/p>\n
It\u2019s easy to arrange for dividend reinvestments; most brokers can set it up for you.<\/p>\n
Bear in mind, if you continuously reinvest dividends in just a few of your portfolio holdings, there\u2019s a chance they\u2019ll eventually account for a much larger share of your portfolio than you intended.\u00a0<\/p>\n
So just remember to review your portfolio periodically and rebalance as needed.<\/p>\n
The bottom line: Reinvesting dividends is one of the easiest ways to grow your wealth long term\u2026 All you have to do is sit back and watch your money grow.<\/p>\n
For more strategies to grow your wealth\u2014including specific stock picks\u2014tune into Wall Street Unplugged Premium each week<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"\u201cA penny saved is a penny earned\u201d is often attributed to Benjamin Franklin.\u00a0 But in fact he said…\n","protected":false},"author":2,"featured_media":698134,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[39],"tags":[28,26313,302232,147,530,1666],"class_list":["post-698133","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-business","tag-dividend-stocks","tag-investing-strategies","tag-personal-finance","tag-personalfinance","tag-retirement"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/698133","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=698133"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/698133\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/698134"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=698133"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=698133"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=698133"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}