Accumulate Shares With Dividend Reinvestment

Dividend reinvestment is a easy way to accumulate shares of a dividend-paying stock. When you buy a stock, exchange-traded fund, index fund or managed mutual fund that pays dividends, instruct your broker to reinvest all dividends or check off the dividend reinvestment option on the mutual fund application. Then each time the company pays a dividend, your dividends automatically buy fractional shares of the stock or fund.

Over many years the fractional shares that you accumulate by reinvesting dividends add up to increase your total return. Suppose you bought 100 shares of a stock for $100 per share. Assume that the stock paid a two percent annual dividend and you elected to reinvest dividends. Furthermore, assume that the stock price increased three percent each year for 20 years. With dividend reinvestment you would have 115.8296 shares at $175.35 per share for a total value of $20,310.80. Without dividend reinvestment you would still have 100 shares worth $17,535.06. So dividend increased the value of your holdings by 15.83 percent.

Posted April 30, 2006.