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Always Reinvest Your Dividends!

Investing Tip #11

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Dividends are obviously important; they can provide the investor with cash to pay their bills. Over time, however, those seemingly paltry amounts can grow into enormous sums. In the article covering Jeremy Siegel’s book, The Future For Investors: Why the Tried and True Triumph Over the Bold and the New, I gave my readers an interesting statistic provided by the professor:

Between 1950 and 2003, IBM grew revenue at 12.19% per share, dividends at 9.19% per share, earnings per share 10.94%, and sector growth of 14.65%. At the same time, Standard Oil of New Jersey (now part of Exxon Mobile) had revenue per share growth of only 8.04%, dividend per share growth of 7.11%, earnings per share growth of 7.47%, and sector growth of negative 14.22%.

Knowing these facts, which of these two firms would you have rather owned? The answer may surprise you. A mere $1,000 invested in IBM would have grown to $961,000 while the same amount invested in Standard Oil would have amounted to $1,260,000 – or nearly $300,000 more - even though the oil company’s stock only increased by 120-fold during this time period and IBM, in contrast, increased by 300-fold, or nearly triple the profit per share. The performance differences comes from those seemingly paltry dividends: Despite the much better per share results of IBM, the shareholders who bought Standard Oil and reinvested their cash dividends would have over 15-times the number of shares they started with while IBM stockholders had only 3-times their original amount. This also goes to prove Benjamin Graham’s assertion that although the operating performance of a business is important, Price is Paramount.

If you're interested in the power of reinvested dividends, check out Dividend Reinvestment Programs - how they work and how you can enroll.

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