Example of how a dividend can grow your holdings

I re-read my previous post and wanted to add an example of how a dividend can help grow your holdings in a stock. I thought that a real world example would make it clearer as to why dividends are beneficial. See below:

Let's keep the math simple....

You buy 100 shares of Washington Mutual when it is at $10. Your original investment is $1,000. Let's assume that the yield of WM is 10%, this means that WM pays dividends that add up to 10% annually. (Usually, dividends are paid quarterly, but they are measured in yield per annum.) Let's also assume that WM stays at $10/share for 5 years with absolutely no appreciation in stock price. This is not really realistic but helps keep my example clear. Even with the share price of WM staying flat over 5 years, you would have increased your holdings because of the compunded dividend growth, assuming you reinvested those dividends. Let me show you.

Year 1: Own 100 shares at $10.
Year 2: (after 10% annual dividend reinvested) Own 110 shares at $10.
Year 3: (after 10% annual dividend reinvested) Own 121 shares at $10.
Year 4: (after 10% annual dividend reinvested) Own 133.10 shares at $10.
Year 5: (after 10% annual dividend reinvested) Own 146.41 shares at $10.

Isn't this crazy? Even with 0% growth in the actual price of a stock, your value of investment went up from $1000 in year 1 to $1464.10 in year 5. A 46% return over 5 years with no growth in the stock OR the dividend. The best part about this is that we all know most stocks will go up over the long term as the business grows and becomes more profitable AND when the businesses become more profitable they in turn usually raise the dividend to share that profit with shareholders. That means that the original investment that you make will grow even more than my example. This just goes to show how powerful dividends are.

Once again, this example was a little extreme, but just goes to show the added value of dividends, if reinvested. I highly recommend that you take some time and research dividend paying companies. Just google dividends and stocks and there will be myriad links to sites listing some good names.

Any questions or comments that you may have are always welcomed, drop a line below.