Simple Wealth-Creating Strategy for Long-Term Investors

Compounding Strategy Every Investor Should ConsiderAs a strong believer in the wealth-creating effects of large-cap, dividend paying stocks, I’m also an advocate of dividend reinvestment, which is the purchasing of a company’s shares using the cash dividends paid.

This can be done commission-free from your broker and/or through the company itself if it offers such a program.

Dividend reinvestment is a powerful wealth creator if you do not require the income paid out by a corporation. It is a great way to invest and to grow your money over the long-term.

As the timespan increases, the percentage return produced by the S&P 500 becomes weighted to dividends. It’s kind of old school, but the numbers add up. Even over a few short years of good broader market performance, total investment returns can increase substantially over simple capital gains.

For example, if you bought shares in Intel Corporation (INTC) at the beginning of 2010, that stock would have produced a capital gain to date of approximately 50%.

But if you reinvested the dividends paid by Intel into new shares each quarter, your total investment return, including dividends and new shares, jumps to approximately 75%, which is a very big difference!

In the utility sector, Duke Energy Corporation (DUK) increased on the stock market about 30% over the last three years. But by reinvesting the company’s dividends into new shares during that same time period, your total return could have climbed to around 49%. Again, this is a material improvement.

Of course, dividend reinvestment excludes the potential returns to be had with the income being applied to other potential assets.

But the process is so easy, and because it should be commission-free, either through a broker/dealer or the company itself, it’s a very attractive extra savings program for a long-term investment.

Sun Life Financial Inc. (SLF) is a global insurance company that pays higher-than-average dividends to shareholders.

This position advanced about 75% on the stock market over the last two-and-a-half years, and it’s been a favorite among institutional investors.

With the company’s higher-than-average dividends paid (its current yield is close to four percent), reinvesting the income into new shares of the company would have produced a total return of approximately 95% over the same period—a big difference once again.

For many investors, however, the very reason why they own shares in dividend paying stocks is for the income they produce.

But as part of a long-term portfolio, perhaps a group of stocks invested for retirement where quarterly or monthly income isn’t a requirement at this time, dividend reinvestment is a powerful addition to potential capital gains.

And the business case for it is especially improved if the underlying company is consistently increasing its dividends to stockholders. Many blue chips do this.

Dividend reinvestment is income put into more shares of a corporation, which produces more dividends paid. It’s a compounding effect that I believe every long-term equity investor should consider.