Dividend investment is an interesting effect. Consider this: With each dividend cycle that is reinvested in the same stock, each future dividend cycle gets a little larger.
Let’s say one stock has a consistent 2.5% yield dividend so if you start with enough shares to receive $250 the first year, it would look something like this:
Start -> $250
Year 1 -> $263
Year 2 -> $269
Year 3 -> $276
Technically the more frequently the compound happens (quarterly versus yearly), the effect grows a bit more. Without the reinvestment (and assuming the dividend rate stays consistent), the dividend would be $250 year over year. So conceptually, even if the per share dividend isn’t increased by the company each year, you’re still getting a little more money per share if you reinvest the dividend back in a new (partial) shares. You could argue the inflation rate devalues the dividend, but did I mention I’m not a tax or economics professional? I’m trying to keep this somewhat simple.
Why is this important? Let’s forecast some years out. (Assuming again the yield stays consistent) how many years might it take to get to $Z if I start at $X with a yearly yield of Y%? The price may increase and the dividend rate may increase but as long as the differential stays at the same net yield you’re adding X% more shares per cycle.
Let’s go back to the $250 starting dividend return
Yield at 2.5%, after 20 years I’m at a $410 dividend return. That’s an increase of almost 64% just in dividends. But if I’m aiming for $1,000 per year for that holding, I either need to find a higher yielding dividend (7+%) or start out with a larger initial investment. Starting with enough shares to have $500 in the first year in a 4% yielding, by about year 18 the dividend return should reach $1,000.
Why am I looking at this from a dollars perspective instead of a yield and yield increase percent? The hard dollars make it easier for me to mentally match up to bills that need to be paid.
PS – for the stocks that are currently have a 3% dividend yield, you’ll probably need an initial investment of about $16,000 to have an initial dividend return of $500. Time to start saving!!
PPS – Also take a look at the yield at the 52 week high. So ideally you want to buy your shares at the bargain price, if the shares regain (and exceed their 52 week high), you may find yourself shares that started at a 3% yield turning into 2.5% unless the company raises it’s dividend to bring the yield back to 3%.