Reinvest dividends for compound growth from "summary" of Investing for Dummies by Eric Kevin Tyson
When a company makes a profit, it sometimes shares that profit with its shareholders in the form of dividends. These dividends can be a nice bonus on their own, but they can also play a powerful role in boosting your investment returns over time.
One way to make the most of these dividends is to reinvest them back into the same stock or fund that paid them. This strategy, known as reinvesting dividends, allows you to take advantage of compound growth. Compound growth occurs when your investments generate earnings, which are then reinvested to generate even more earnings. Over time, this can lead to exponential growth in the value of your investment.
Let's break it down. Say you own 100 shares of a stock that pays a $1 dividend per share each year. If you choose to reinvest those dividends, you would use that $100 to buy more shares of the same stock. Now, instead of owning 100 shares, you own 105 shares. The following year, if the stock pays the same dividend, you would receive $105 in dividends. By reinvesting those dividends again, you would end up with even more shares. This cycle continues, with your investment growing larger and larger each year.
By reinvesting dividends for compound growth, you can accelerate the growth of your investment portfolio without having to invest more money out of pocket. This can be especially beneficial over the long term, as the effects of compounding become more pronounced. So, the next time you receive a dividend payment, consider reinvesting it to take advantage of this powerful wealth-building tool.
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