Retirement Planning: Dividend Reinvestment

Many established stocks release dividends to their shareholders. Dividends are payments (often quarterly) of a specific amount granted per share owned. For example, let’s say you own 215 shares of Proctor and Gamble (PG). P&G paid a $.31 dividend last week. So this means that your 200 shares have earned you: 220 x .31 = $66.65.

So, your a long term investor and want to accumulate value on your stocks. What to do? Reinvest those dividends! Most stock brokerages offer dividend reinvestment plans, which allow you purchase more shares of the particular stock that just paid you dividends with the dividend payment (so this means we could buy another share of PG with our dividend payment).

Over time you will continue accumulating shares and your dividend payments will grow. This process may even be accelerated if the total dividend payments exceed the price of a share of stock. 50 years from now those dividend payments may be massive, providing a sizable amount of portfolio value.

Watch it in Practice:

If you invested 1,000 in Proctor and Gamble in '95 what would your asset be worth today:

- 95': Bought 53 shares (1000 initial investment / $19.00 average per share). Received annual dividend = $.40 and reinvested at a price of $19.50. Now own 54 shares of PG (.40 x 53).
- 96': Received annual dividend = $.45 and reinvested at $20.00. We now own 55.25 shares of PG.
- 97' Received annual dividend = $.50 and reinvested at $25.00. We now own 56.5 shares of PG.
- 98' Received annual dividend = $.56 and reinvested at $31.00. We now own 57.5 shares of PG. - 99' Received annual dividend = $.62 and reinvested at $41.00. We now own 58 shares of PG.
- 00' 2 for 1 split (shares are now 58 x 2 = 116). Received annual dividend = $.70 and reinvested at $29.00. We now own 119 shares of PG.
- 01' Received annual dividend = $.77 and reinvested at $34.00. We now own 122 shares of PG.
- 02' Received annual dividend = $1.17 and reinvested at $30.00. We now own 127 shares of PG.
- 03' Received annual dividend = $.90 and reinvested at $45.00. We now own 129.5 shares of PG.
- 04' Received annual dividend = $1.00 and reinvested at $54.00. We now own 132 shares of PG.
- 05' Received annual dividend = $1.12 and reinvested at $54.00. We now own 135 shares of PG.
- 06' Received annual dividend = $1.25 and reinvested at $62.00. We now own 138 shares of PG.

So in a little over 10 years we have almost tripled the amount of shares we started with leaving us with a portfolio value of over $8812 (63.86 x 138). A 881% gain!