Strategies - Dividend Reinvestment

Dividends are basically returns from an investment. Investors must choose to either consume (spend) the dividend payment or to invest it in the same investment or some other investment. The term dividend reinvestment generally refers to dividends being invested back into the investment from which they were earned.

The benefits derived from this strategy can be quite impressive. If an investor chooses to consume dividends, the principle will have grown only from appreciation. For example, assume a stock selling for $30 pays a dividend of $2.00 at the end of each year and will appreciate over time at a compound rate of 10%. The following table illustrates the results of consuming or reinvesting the dividends after 10 years.

As you can see, reinvesting the dividends will resulted in a 41% larger asset at the end of a 10 year period (given the assumptions above).