Compounding Dividends

One of the benefits of owning some stocks are their dividends, these are payments that are made to owners of the stock over certain time periods per stock they own. Dividends are payed out half yearly, quarterly or even monthly in some cases.

Dividends almost act like a reward for owning a certain stock, but they are more than just a reward. Dividends can be incredibly powerfull especially when you reinvest them. Once you reinvest dividends your total value of your investment compounds thus increasing the total value of you investment, all without having to spend extra money.

So for instance, you own a stock to the value of $100, this stock on average increases by 7% per year, but pays out a 4% dividend quarterly(4 times a year). So to work out how much dividends you'll receive you take 100*(0.04/4)=$1. This indicates that, without growth, you'll receive $1 every quarter. But if you reinvest it Your second quarter payment will be 101*(0.04/4)= $1.01, ecluding the growth of that quarter. This is where the value of compound dividends come into play.

The more you reinvest the higher your dividends the quicker your investment grows. This is very powerful. over the long run as it allows you to increase your investment without having to worry about investing more of your own money in it.

Compounding dividends is one of the most powerfull "weapons" an investor can use in his arsenal. There are many ways to go about this, high dividends low growth, low dividends high growth. But the key is to find the perfect balance, there where you get optima returns. I've found that the best ratio is 3% dividend to 10% growth, this gives you a net annual return of roughly 13% depending on when you get your dividends.