In the previous post, we showed how letting dividends reinvest can grow one’s wealth automatically. In that post, we showed three examples of dividends: starting yield of 2% with no increases, starting with a 2% yield with a 2% annual increase, and starting yield of 3% with a 3% annual increase.
One of the most important features of those examples is that once you have purchased dividend shares, you will be able to grow your net worth automatically. Once you start, it can happen on its own without any additional effort on your part, if you so choose.
This post shows the same data as the previous post in graph form. Visually seeing the growth on a graph usually makes more of an impression than a chart of numbers. At least for some. All examples start with a $2,500.00 investment, and lasts for 20 quarters.
In this accompanying graph, it is obvious that both examples of starting with a 2% yield, one with no annual increases, and the second with a 2% increase, shows almost no difference, even after 20 quarters. The difference after that time is $11.05 ($2,773.29 – $2,2762.24).
However, the example with the 3% yield with a 3% annual increase shows a dramatically different result. The final total after 20 quarters is $2,921.48, which is $159.24 greater than the 0% increase example, or $148.19 greater than the 2% increase example.
What Does It All Mean?
Two major factors. Certainly, starting with a larger yield makes a difference, and having a larger annual increase also makes a difference. There are innumerable permutations on these examples that could be shown, but it seems clear that these three can suffice to show how one’s assets and net worth can increase by starting something profitable.
Do And Not Do
There are some specifics and some assumptions related to these examples, and to dividend reinvesting in general. First one must start. Nothing happens if one does not begin.
These examples show a starting investment of $2,500.00. These are only examples. One can start with less or with more. I chose $2,500.00 for these examples because it was a round number of 50 shares at $50.00 each. There is nothing magic about $2,500.00 or 50 shares or the price $50.00. One could start with more or less. Even a lot less gets you started. Start with what you have. As mentioned in the post Financial Success Is Possible, “Don’t even begin here unless you have an emergency fund. You need money in the bank that can cover your expenses for at least several months, the amount is up to you. You don’t want a temporary need for cash to force you to sell.” And: “Now that you have an emergency fund, don’t touch it! Do not use your emergency fund money for this process. Save additional money to start your financial journey.”
My dividend reinvesting journey began with a single share of Johnson & Johnson. So don’t let the numbers deter you from starting. Remember: First, one must start. Nothing happens if one does not begin.
The Next Step
Dividend Reinvestment is automatic once one specifies so in your account. It stays that way indefinitely unless you change it. This brings us to the second point: it is my opinion to keep dividend reinvestment on my accounts. The power of compounding growth gets greater and greater as time goes by. The key at the beginning is to not use the dividends for any purpose except reinvestment.
But Wait, There’s More
It should be said that while a higher yield is nicer than a lower yield, and a high annual increase is nicer than a lower, or no, annual increase, one should not automatically assume that a higher yields should be the only focus of one’s investment goals. Many times a very high yield means that the company is headed for hard times. Sometimes a very high yield foreshadows a dividend cut or suspension.
So, What is High and What is Low?
Generally, a yield much higher than an average company is suspect. So what is average? It varies. As mentioned in the Investopedia entry referenced in last week’s post, “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 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.”
As of this writing, the S&P 500 dividend yield is about 1.91%. Common yields can range up to 4% or 5%. Sometimes good solid companies have yields that exceed even those norms. But one should be wary of excessive yields. Don’t get caught in a “dividend yield trap.” There is a good description of this phenomena here.
What is you dividend reinvestment story? 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).