How to Make Dividends Work for You

Although the dividends investments pay may seem small, they are a big part of the long-term returns you receive. The key to success is reinvesting those dividends into additional shares of stocks or bonds. That way, you put compounding to work for you again. Every time you get a dividend, you reinvest it into buying more shares. Therefore, your next dividend will be even larger, which means you can reinvest into even more shares. And of course, you own more shares, so your portfolio value increases more when the stock price goes up.

Say you invested $100 in the Standard & Poor’s 500-stock average in 1926. If you spent all the dividends you received, your portfolio would have reached approximately $7,079 by the end of 2008. That’s a 708% increase! It sounds good until you see that reinvesting your dividends would have grown your $100 to $204,945, a 2,049% increase!