The Magic of Automatic Dividend Reinvesting .

If you have ever been to the Republic of Ireland chances are that it was raining! It always rains. Except of course, when your on lockdown and cant go anywhere! That is when Mr Sun decides to come out.

What is seldom seen is wonderful however so I am enjoying relaxing in my back garden. Sipping on a fine glass of Merlot while my son is reading a book.

Am I a Rich Dad or a Poor Dad?

Today’s post is inspired by a conversation I had about Dividend Investments with my eldest son. “AJ Rock” as he likes to call himself asked me why I invest in companies that pay dividends instead of Real Estate. He is currently reading Rich Dad Poor Dad by Robert Kiyosaki and just got to the part where it describes Real estate as Assets.

I was impressed that he challenged me on this. I was also impressed that he could easily distinguish between an asset and a liability. When I was 10 I didn’t even know those words existed. I asked him if I remind him more of the rich Dad or the Poor dad in his book and he told me that I reminded him of both!

I sounded like rich dad because I talk about being wealthy and investments and savings but I acted like poor dad because I bought a house way above what it was worth. (His words and I could not argue against any of that)

As a side note – I think it is important to teach your kids about money from an early age. There is a cool podcast from @FIafter40 here on what he believes are the four rules you need to teach kids.

During our conversation, I acknowledged that real estate certainly has a place in any portfolio but I like Dividend Investing because they have magic powers.

The Magic of dividend reinvesting

The magic powers I am talking about of course is the power of Dividend Re-investments.

Reinvesting your dividends flexes the true power of why dividend investing can be so successful. Dividends can be reinvested manually or if your broker allows by using DRIP.

DRIP stands for Dividend Reinvesting Plan and not all brokers will offer this service so check that out before you sign up to a broker.

REINVESTING DIVIDENDS ADVANTAGE

1. Stress Free – You do not have to worry about anything because dividend cash will be used to buy new shares automatically.
2. Dollar cost Averaging – You could potentially pick up shares at a lower price than you initially paid.
3. Timing – You won’t be tempted to time the market
4. Compounding – The new shares will now generate new income, which will generate dividend payments which now produce more income.  etc.

REINVESTING DIVIDENDS DISADVANTAGES

1. Dollar Cost Averaging –  Yup, I know that I have this in as an advantage and disadvantage. That is because you could also potentially pick up shares at a higher price. Particularly in a bull market.
2. Value –  The company many now be over valued and your cash may be better reinvested somewhere else

An Example of why DRIPs are magic

Maybe it will be better to show you the true magic powers of DRIPS through some graphs.

I am going to use Coca Cola (NYSE: $KO) as an example. First i downloaded the daily close price from 1962 from www.macrotrends.net.

I than got the historical dividend data from the 9th of march 1990 until march 2020 from https://dividata.com/

Starting with $1000 you could of bought 221 shares of Coca cola in 1990 at $4.51 per share. If you did not reinvest your dividends, you would of earned $4,576.91 from dividends and your shares would be worth $10,941.71 on the 13th march 2020. That is a total of $14,582.62 profit from your original deposit.

However if you had a DRIP set up and the dividends were reinvested for no extra work you could of increased your profit. Instead of 221 shares that you originally had, you would now have 435 shares. This would give you an account worth of $21,567.45. Dividends reinvested along the way would amounted to $7043.78.

I think the two graphs really hammer home the difference between reinvesting and not. it also looks obvious but for this to work, it requires a long tern plan. You can see that in the 2 graphs there is little difference after 15 years but as we spend longer in the market, the snowball effect ramps up and the gap becomes greater.

This is just one of the reasons why I like dividend investing. I would love to hear your thoughts on it? Do you invest in dividend stocks or do you have any questions.

The spreadsheet is also available for anybody who wants it. Drop a comment below and it will be sent straight over to you.

Thanks for stopping by and happy investing!

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