It’s a few years old but Reinvesting Dividends vs. Not Reinvesting Dividends: A 50-Year Case Study of Coca-Cola Stock is still a great piece on the power of reinvesting dividends.
Dividend Reinvestment vs. Spending Your Dividends
The short version, for the casual readers of the site: Imagine you had two identical investors, James and Thomas, both of whom bought $10,000 worth of Coca-Cola stock in mid-June 1962. James reinvests his dividends, Thomas does not.
- Thomas without Dividend Reinvestment. Thomas bought $10,000 worth of Coca-Cola in mid-June 1962. This resulted in 131 shares in his account. He ignored the stock. Over the past 50 years, he collected $136,270 in cash. That is more impressive than it appears because $1 in dividend income back in the 1960’s had significantly more purchasing power. Adjusting for inflation, the current dividend equivalent of the cash income he was paid is $193,350. On top of this, his 131 shares of Coca-Cola have grown into 6,288 shares of Coca-Cola with a market value of $503,103.
- James with Dividend Reinvestment. James bought $10,000 worth of Coca-Cola in mid-June 1962. This resulted in 131 shares in his account. He reinvested all of his dividends over the years. He never added to nor took away from the position over than those reinvested dividends. Today, James is sitting on 21,858 shares of Coke stock with a market value of nearly $1,750,000. His annual cash dividend income is nearly $22,000.
A chart from the same site showing the difference between reinvesting your dividends and not reinvesting your dividends.
We do not automatically reinvest dividends back into current positions. We use a more selective approach. We look at the portfolio as one big income stream and we reinvest dividends back into the individual positions we view as the cheapest at that time. We will also use dividends to start a position in a new high-quailty dividend growth stock. However, on a whole we are reinvesting those dividends back into the portfolio to compound income growth faster and to increase purchasing power every year.