Market Wrap-Up for Nov. 25 – Thou Shalt Always Reinvest Dividends

For many investors, dividends serve an important purpose as a source of stable income, especially for those individuals near or in retirement. But for all other investors, dividends can and should be a tremendous tool to compound wealth over a long timeframe. Whether you are in your 20s, 30s, 40s or 50s, investors need to remember to utilize a dividend investing strategy, even if it is often plagued with a “boring” stigma. It won’t be so boring when you’re financially well off in your 60s, 70s, and beyond.

In The Ten Commandments of Dividend Investing, the number two commandment states “Thou Shalt Always Reinvest Dividends.” As the post points out, when investors reinvest their dividends, letting their money work for them, it results in compounding returns that exponentially increase over a long timeframe. In contrast, focusing on growth stocks with seemingly substantial capital gains will limit the amount of wealth that is built up, making it that much harder for investors to adequately save for retirement.

For example, the Dow Jones Industrial Average has returned 59.39% over 10 years. At face value, that seems quite reasonable, but when accounting for reinvested dividends, the Dow Jones Industrial Average returns 105.45% over 10 years – almost doubling the gains. As the timeframe expands, the difference between capital gains and total return (capital gains plus reinvested dividends) becomes even more drastic, proving that reinvesting your dividends remains the best way to build wealth over the long-run. Read more about how reinvested and compounding dividends can work for you.

DRIPs

Ideally, dividend-focused investors should enroll in a Dividend Reinvestment Plan to make the dividend reinvestment process that much easier. Whether it is directly through the corporation issuing your stock or a broker sponsored DRIP, these reinvestment plans will allow an almost seamless process for reinvesting dividends, without the extra broker commission fees. For more, see Everything Investors Need to Know About DRIPs.

The Bottom Line

As I said from the start, reinvesting dividends is not a strategy for everyone. If you are an investor that relies on your dividend payouts as income, then by all means stick to your plan. But for all others that are investing in the stock market as a way to ensure financial prosperity in your golden years, reinvesting your dividends will make that goal much easier. Hopefully, you will have executed your plan successfully so that by the time you reach retirement you will have built enough wealth that you can switch your dividend strategy and live off the sizable dividend payouts as your main source of income.

Today in the Markets

Despite rising early, the major indices saw some choppy trading action before a late-day decline, ultimately finishing about flat.

Dividend stocks posting solid gains today included Footlocker (FL), RR Donnelly (RRD