While a significant portion of my personal stock holdings are
small caps, I've always made sure to own a healthy number of
dividend-paying stocks too (including small, mid and large
The carrot here is that using very conservative assumptions
and buying household names, it's possible to double your money
over 20 years - even if your stock trades totally flat.
I've recently realized that not many people understand how
this is possible. In fact, some of my closest friends didn't know
how to reinvest their dividends to begin with … before we got to
talking about it.
This needs to change.
I realize that a lot of people buy dividend-paying stocks to
generate necessary income. But it's worth stating that one of the
guiding principles of investing is to forgo spending money now in
order to have more later on.
So if you don't need the income, are younger and/or plan to
hold your stock for a long time (or give it to your kids or
grandkids), I strongly recommend enrolling all of your
dividend-paying shares in a Dividend Reinvestment, or
Doing so can make the difference between a little money now
and a lot of money later.
Better still, it's essentially painless to do. Just contact
your broker and instruct them to enroll your eligible shares in a
DRIP. That should take care of it - you just sit back and
accumulate shares as time goes on.
Reinvesting your dividends means you can potentially double
your money, even in a flat market. To understand how this is
possible, it's best to use a simplified example with a few key
Let's say you buy 100 shares of a stock that yields 3.75%
annually and enroll it in a DRIP.
Great companies yielding close to this today include
BHP Billiton (
Now assume the stock trades flat for the next year. After
owning the DRIP-enrolled stock for one year your ownership
increases by 3.75%, to 103.75 shares.
After a second year of trading flat, your 103.75 shares become
107.64 shares. After five years of trading flat you own 115.87
shares and after 10 years you own 139.28 shares. At this point
you could sell for a 39.28% gain. Remember this assumes zero
capital gains over the 10 years.
After 20 years, assuming the stock price hasn't moved at all
(and you've done absolutely nothing), you'll own 201.27 shares -
twice as many as you originally bought.
Despite the share price trading flat the compounding effect of
reinvested dividends means the value of your initial investment
has gone up by 101%. This is how it looks in a graph.
While this is clearly an oversimplification, it's so easy to
comprehend for a base-case scenario that I find it gets people's
attention, mainly because a 3.75% yield is pretty attainable.
From here you can tweak the numbers to suit your risk profile.
If you want to try to double your money in just 10 years, your
magic yield is 8%. You can come close to that with some utilities
or master limited partnerships (MLPs).
Or if you are really aggressive and a bit more risk tolerant,
a 12% yield means you'll double your money in just over seven
years, again assuming your stock trades flat.
The implications here are pretty straightforward. You're not
necessarily looking for a big rise in the share price but rather
an increase in your ownership of the company.
Of course, these days it's more likely that the share price
will rise over time, resulting in a much larger total return.
That higher share price could mean your reinvested dividends will
purchase fewer shares, but solid dividend payers have a cure.
The ones you will want to buy should have established track
records of maintaining a target dividend yield. This means they
increase the amount of the dividend over time to keep pace with
share price appreciation.
Like I said, enrolling shares in a DRIP is painless; just
contact your broker and it's free. After you do so, all future
dividend payments will be reinvested in new shares of stock (even
fractional shares), without commissions. I've done so with all of
my dividend-paying stocks, and I don't expect to remove them