Quick Dividend Automatic Reinvesting Question

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tchasteen
Posts: 41
Joined: Tue Oct 21, 2014 6:57 am

Quick Dividend Automatic Reinvesting Question

Post by tchasteen » Wed Apr 19, 2017 5:03 pm

Hi fellow BHs,

Let's say I invest 25k in the S & P 500 at 2300 and over a 10 year period it goes through a huge crash (down to 700 let's say), rebounds and then ends at 2300.

1. Would my portfolio be worth 25k?
2. Would I be better off because although my portfolio is worth the same, I now own more shares through the dividend reinvesting (portfolio will grow faster)?

Thank you,
Tim

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bertilak
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Location: East of the Pecos, West of the Mississippi

Re: Quick Dividend Automatic Reinvesting Question

Post by bertilak » Wed Apr 19, 2017 5:36 pm

tchasteen wrote:Hi fellow BHs,

Let's say I invest 25k in the S & P 500 at 2300 and over a 10 year period it goes through a huge crash (down to 700 let's say), rebounds and then ends at 2300.

1. Would my portfolio be worth 25k?
2. Would I be better off because although my portfolio is worth the same, I now own more shares through the dividend reinvesting (portfolio will grow faster)?

Thank you,
Tim
If I follow you correctly, your portfolio would be worth a lot more than 25K. Given that the price has recovered to its original value and that you have been collecting dividends for 10 years, you would be ahead even if you didn't reinvest because you would have all those dividends sitting there as cash. If you had reinvested you would have benefited from 10 years of compound growth. It's the compounding that really gives things a kick.
Listen very carefully. I shall say this only once. (There! I've said it.)

Derby
Posts: 77
Joined: Tue Sep 09, 2014 1:56 am

Re: Quick Dividend Automatic Reinvesting Question

Post by Derby » Wed Apr 19, 2017 5:51 pm

This has been posted quite a bit here before, but it will answer your question. Like Bob, the world's worst market timer, you will come out ahead. :D :moneybag

http://awealthofcommonsense.com/2014/02 ... ket-timer/
Carpe Diem.

alex_686
Posts: 2548
Joined: Mon Feb 09, 2015 2:39 pm

Re: Quick Dividend Automatic Reinvesting Question

Post by alex_686 » Wed Apr 19, 2017 5:59 pm

Focus on Total Return as a percentage.

Ignoring taxes, it does matter if that return comes from dividends or capital appreciation. It certainly does not matter how many extra shares you have.

Now your situation is working off of the S&P index, and the index is a little bit nonsensical. The S&P index works off on only changes in prices, not dividends. So you are kind of on the right track. The problem is the stock market goes in fads. Sometimes cash is returned to shareholders in dividends, other times stock buy backs. Sometimes profits are plowed back into new investments. So yeah, in your example your portfolio should be larger thanks to reinvesting your dividends. But who really knows?

I personally use the S&P 500 Total Return index as my baseline. It is not quoted as often but it is better since it does incorporate reinvested dividends.

NibbanaBanana
Posts: 194
Joined: Sun Jan 22, 2017 10:34 pm

Re: Quick Dividend Automatic Reinvesting Question

Post by NibbanaBanana » Wed Apr 19, 2017 6:15 pm

S&P dividends are remarkably robust. From 1960 - 2000 there were only a couple instances where dividends were cut, and by less than 5%. In the 2002 crash they were cut about 5% but recovered quickly. In the 2008 crash the entire financial sector stopped paying dividends but the S&P dividends only dropped a little over 20% and pretty quickly recovered. Stock prices are all over the place but S&P dividends are pretty stable.

"Dividends Matter" - John Bogle

tchasteen
Posts: 41
Joined: Tue Oct 21, 2014 6:57 am

Re: Quick Dividend Automatic Reinvesting Question

Post by tchasteen » Fri Apr 21, 2017 5:36 am

Thanks Bertilak and Alex,

I hadn't realized that dividends were not included in total value of the market.

I appreciate the link Derby!

pshonore
Posts: 5662
Joined: Sun Jun 28, 2009 2:21 pm

Re: Quick Dividend Automatic Reinvesting Question

Post by pshonore » Fri Apr 21, 2017 8:42 am

tchasteen wrote:Thanks Bertilak and Alex,

I hadn't realized that dividends were not included in total value of the market.

I appreciate the link Derby!
They are however included in the performance figures of "market" ETFs like IVV and VOO which track the S&P 500 and Mutual funds as well (VFIAX)

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