Today, I will demonstrate the real power of dividend investing, which is only revealed
on a long timescale.
That is the compounding effect of dividend reinvestment.
Throughout the video, I’m going to illustrate this principle by modeling 35 years of investment.
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video.
The reason why I’m sharing this is that new investors are often discouraged or frustrated
by a lack of early results in their investments.
This NEEDS to be emphasized after a year like 2022 when the stock market has declined significantly.
So through using multiple examples, I will show you how this snowball effect can be your
path to financial independence and building generational wealth.
To build out this model, I’m going to use the sample statistics of one of the most popular
dividend ETFs, SCHD.
This fund tracks an index of stocks focused on the quality and sustainability of dividends.
However, this is just one example of many different options that can be used.
The real purpose is just to demonstrate this snowball effect at work.
So I took the historical statistics of the fund and projected them forward over 35 years.
The current stock price is $74.69, and the current annual dividend payment over the trailing
twelve months is $2.56.
For the expected growth rates, we will take a slightly more conservative outlook than
its reality over the past decade.
Let’s put the compound annual growth rate of the dividend at 10% and the compound annual
growth rate of the stock price also at 10%.
First, let’s look at how a 1-time investment of $1,000 will perform over 35 years.
In the end, we have a total value of $92.7k when reinvesting dividends and $32.3k when
not reinvesting dividends.
This is a massive difference of over $60k.
That means over 65% total return is from reinvesting dividends!
It should be noted that although the total value is much lower, you would receive all
earned dividends as cash.
In totality, you earn $9.2k when you don’t reinvest dividends, which is far from closing
that gap in total value.
When reinvesting dividends, you will actually earn far more total dividends.
In this projection, you will earn $20.8k in total dividends.
That’s more than double.
The reasoning for this is that you’re buying more shares of the stock with your dividend,
which increases your following dividend payout, increasing the number of shares you can buy
next, thus increasing your future payouts, even more, creating a snowball effect that
compounds over time.
This is a powerful method to exponentially increase your ownership stake and earning
power.
For context, in year 35 you now own over 38 total shares, whereas if you didn’t reinvest
dividends you’d only have the initial 13 shares you purchased.
This has a massive impact.
Not only is the value of your investment and its earning power increasing, but so is your
ownership stake itself.
By the end of 35 years, if you reinvest your dividends you will be receiving $2.4k in annual
dividend income.
That is a 246.21% dividend yield on cost.
This dwarfs the $874 in annual dividend income from the model not reinvesting dividends.
At this point, you can continue reinvesting your dividends and see even more massive growth
than before or start taking out the payments as cash.
Even if you choose to stop reinvesting your payout will still continue to grow as the
dividend is increased over time.
So the earlier you can start investing and capitalize on this reinvestment time the better
your results will be.
So that’s what would happen on a small scale if you just did a 1-time investment of $1,000.
But what would the results be if you had a more comprehensive investing strategy?
Let’s look at how investing $1,000 every month over 35 years will change the results.
This means that over 35 years you would have invested $420,000.
By the end, we have $8.45 million when reinvesting dividends and $3.8 million when not reinvesting
dividends.
This is a crazy difference of $4.65 million between the 2 strategies.
Now again to be fair you would receive $944k in total dividends during this time if you
don’t reinvest.
This is nearly $3 million less in total value compared to if you had reinvested dividends.
However, the most important factor is the dividend income that you’ll be receiving.
By the end of 35 years, you’ll be receiving $224k in annual dividend income if you reinvested
dividends.
This is 53% of your $420,000 cost basis.
That means you’re more than doubling your money every 2 years from dividends alone.
If you hadn’t reinvested then you would have $102k in annual dividend income, which
is just under 25% of the cost basis.
Once again, the longer you go through this process of dividend reinvestment the better.
You are continually using your income to increase your ownership stake and future dividend income.
The snowball effect of dividend investing only gets stronger with time.
This is why it’s so important to start investing young and to reinvest as long as possible.
If you want to try out the projection model that I created for this video then head over
to my website dividenddata.com.
There is a free version available with the basics of the projection.
If you become a dividenddata.com member, then you can use the full model with all the graphs
and data I showed throughout the video.
It should be noted that a model is only as valuable as it’s inputs and this could all
vary significantly in reality.
Feel free to try it out along with all my other investing tools.
Thank you for watching Dividend Data!
I’d greatly appreciate it if you leave a like and subscribe to the channel.
Every month you’ll get a breakdown of my full long-term dividend stock portfolio and
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