Daily Gains Letter

One Way the Rich Are Getting Richer

By for Daily Gains Letter | Feb 14, 2013

















Couple in living room toasting champagne and smilingFor the most part, the rich keep getting richer, even when there’s a recession. Once you accumulate enough money, your money starts working for you; and the key to getting richer with your investments is dividend reinvestment. About 40% of the S&P 500’s total return over the last 70 years has come from dividends. And here’s the best part, you don’t have to go looking for highfliers or risky technology plays; boring blue chips compound wealth the fastest through dividend reinvestment.

Before the stock market got really popular (and when interest rates were higher), investors used compound interest to keep making money. The same concept is employed today through dividend reinvestment, and the numbers make a powerful case.

Say you invested in Bristol-Myers Squibb Company (NYSE/BMY) around this time four years ago, and you signed up for the company’s dividend reinvestment program, through which dividend income was returned to you in the form of new shares in the company. Back then, on the stock market, the company’s shares were trading around $22.00 a share. The company’s stock chart is below:

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Chart courtesy of www.StockCharts.com

Today, the stock is worth just over $36.00 a share, providing a simple return on investment (ROI) of approximately 64%, excluding dividends. But, if you include the new shares you accumulated through dividend reinvestment, your investment return skyrockets to approximately 98% over the same period of time. (Thanks to Morningstar.com for the numbers.) That’s a big difference, and it’s the reason why the rich keep getting richer—even if Bristol-Myers didn’t move upward on the stock market, dividend reinvestment would still have produced positive returns.

Consider, for example, if you chose PepsiCo, Inc. (NYSE/PEP) instead of Bristol-Myers. Your simple ROI from August 2009 to the present would be approximately 26%. Through dividend reinvestment, your return jumps to just over 40% without missing a beat. It’s a compelling story, and it’s a great way to accelerate your returns over time.

Dividends are on the comeback trail in terms of their popularity on the stock market. Corporations are sitting on mountains of cash, unwilling to make bold new investments in this economy. Accordingly, the frequency of dividend payments is increasing, and so is the number of share buybacks.

For quite a while during the 1990s, dividends were considered “old school” and stodgy. If a company paid dividends, it wasn’t growing fast enough to be worth buying on the stock market. Nowadays, in the age of austerity and very little real economic growth, dividends are crucial.

Dividend reinvestment is one of the best ways to make a lot of money from the stock market—from mature, blue chip companies, at least. You can rest assured that if there is a stock market correction, your investment will still be in business.

The stock market is now in the process of topping out, and we’ll likely experience a meaningful correction this year. Corporations are in excellent financial shape these days, so if we get a major stock market correction, the first thing I would do is buy shares in select blue chip companies that offer a dividend reinvestment program. Dividends compounding into more dividends—it’s the one big reason why the rich keep getting richer.

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