Dividend reinvesting is simply using the dividends you receive to buy more shares in the issuing company. In a sense, you’re receiving more shares without adding any new additional capital to the mix. It’s almost like receiving free shares. This can be accomplished through a direct reinvestment plan (DRIP) or via your brokerage account.
Reinvesting is a slow, steady process that allows investors to receive many more dividends in the future than they would have otherwise. For most brokerages, all that’s required is to check the reinvest dividends box when buying shares, and it becomes an ongoing, automatic pilot process that builds and builds and builds.
It is the ultimate long term investing process. In the beginning, the effects are very small but as the years go by they grow in a geometric-like progression. In general, it takes around 7-10 years to begin to see significant differences in the amount of dividends received versus not reinvesting. The example below illustrates the progression of total reinvested dividends (R) versus total collected dividends (C) starting with a one-time $1000 investment in Southern Company (SO), an electric utility in the southeast U.S., in January 2000.
Dec 2000 R $52 C $52 | Dec 2003 R $315 C $288
Dec 2005 R $541 C $470 | Dec 2007 R $809 C $667
Dec 2010 R $1311 C $995 | Dec 2011 R $1510 C $1133
Dec 2012 R $1727 C $1235 | Dec 2013 R $1960 C $1362
Dec 2014 R $2213 C $1493 | Dec 2015 R $2487 C $1629
Dec 2016 R $2784 C $1769
The data show that in 2003 there was only a 9% difference while in 2007 the difference was 21%. By 2010, the difference was 32%. And, by 2016 you would have collected over $1000 or 57% more dividends by reinvesting.
The yearly dividends collected for 2016 shows an even larger difference with $296 vs $140, a difference of 111%. The resultant dividend yield for your reinvested dividends in 2016 would be 29.6% vs 14.0%. That’s quite a significant difference. And all that was required was to check a box to set it into motion. An added plus is that almost all brokerages charge no commission for reinvesting transactions.
So if you want to truly turbocharge your dividend collecting, reinvesting is the way to go. Just be sure to use companies that have a very high probability of long term viability for those investments.