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How to Make Dividends Work for You

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Posted May 27 2010 12:28 PM

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!

Personal Investing: The Missing Manual

Learn more about this topic from Personal Investing: The Missing Manual.

Take control of your funds with Personal Investing: The Missing Manual. This lively and easy-to-understand guide provides the confidence, tools, and insight you need to evaluate and invest in financial products that target success over the long term. You'll learn how to set goals and research the types of investments -- mutual funds, stocks, bonds, and other financial products -- that can best help you achieve them.

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