“He who understands it, earns it. He who doesn’t, pays it.”
This is a quote from Albert Einstein, whom we can safely say was one of the brightest minds in history. Another Einstein quote that doesn’t get as much traction as the first, is “The real route to riches is to set aside a portion of your money and invest it, so that it compounds over many years”.
If we take a look at the benefits of compounding using the stock market, we look into stocks that offer dividends. Along with the opportunity for capital growth in the share price. These shares must also offer what is known as a Dividend Reinvestment Plan. Which offers shareholders their dividend payments in shares as opposed to cash payments. In order to show a fair and true comparison for the benefits of reinvesting dividends and the wonders of compounding, we have compared 3 of the biggest stocks in our market. Commonwealth Bank (CBA), Fortescue Metals Group (FMG) and Macquarie Bank (MQG), along with an Exchange Traded Fund, the Vanguard High Yield fund (VHY).
The below table shows that if we invested $50,000 in to each of these shares in June of 2013, the difference between what the cash dividend would have been, and what the shares received are worth through utilizing Dividend Reinvestment. The ‘Total Holdings with DRP’ column shows what the overall holding would be worth if you had simply invested the initial $50,000 in June of 2013, and nothing further, only utilizing the Dividend Reinvestment Plans.
The process of buying, selling, receiving or re-investing dividends is the same as buying an individual company.
| Stock Code | $50k invested | Cash Dividends Received | DRP Shares Received | Total Holdings with DRP | Difference |
| CBA | 780 Shares | $27,729.00 | 420 Shares ($44,730.00) | $127,766.60 | $17,001.00 |
| FMG | 15,000 Shares | $127,800 | 15,263 Shares ($329,833.43) | $653,973.67 | $202,033.43 |
| MQG | 1,250 Shares | $51,025.00 | 563 Shares ($114,671.84) | $368,890.59 | $63,646.84 |
| VHY | 850 Shares | $27,389.47 | 581 Shares ($40,844.30) | $100,590.26 | $13,454.83 |
As we can see, in all four cases, it was better to have used the dividend reinvestment plans on offer. And the wonders of compounding have mean that you have ended up ahead in every instance. With the remarkable example of Fortescue Metals Group showing that you would be over $600,000 in front on your initial investment of $50,000.
These are just some of the many examples of how utilizing compounding can increase your returns on your portfolio over time.
To discover more about how this could work for you, phone iInvest Trading & Advisory on 07 5520 8788 or send us an email admin@iinvestadvisory.com
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