Should You Reinvest Your Dividends?
I recently shared some thoughts on LinkedIn, and for reasons I still don’t fully understand, the post ended up with more than 30,000 impressions. I am told that is a good thing, even if I am still not entirely sure what counts as an impression. Since it is Thanksgiving week, I thought it might be a fun one to revisit so you have something new to discuss around the dinner table with that one relative who always brings up something unusual or uncomfortable.
The question I raised was simple: should you reinvest your dividends? It is a topic that sounds technical at first, but the long term numbers tell a very clear story.
From 1928 through 2022, the S&P 500 grew roughly 21,500 percent when you look only at Price Returns, which reflect the change in stock prices without including dividends. That is already an impressive figure and it highlights the strength of long term equity growth. When you include reinvested dividends, the Total Return climbs to an extraordinary 750,000 percent. The average annual return increases from 5.8 percent to 9.9 percent. Although those numbers may seem relatively close, the difference compounds dramatically over long periods of time. The end result is roughly a thirty five times larger return when dividends are reinvested rather than taken in cash.
A simple illustration helps show the contrast. One dollar invested in 1928 would grow to about 216 dollars today based on price appreciation alone. The same dollar, with every dividend put back to work, would grow to approximately 7,500 dollars. The gap between those two figures is the power of compounding silently working in the background year after year.
Most investors have not been active for a full century, so it helps to look at more recent data. Over the last thirty years, the numbers continue to support the same conclusion. Here is the comparison at a glance:
- Price Return average: 7.5 percent
- Total Return average with reinvested dividends: 9.6 percent
Even a small difference in annual returns can influence long term results in a meaningful way, especially for people who invest consistently throughout their working years.
The takeaway is straightforward. If your portfolio generates dividends, reinvesting them is one of the simplest ways to improve long term results. It requires no additional effort beyond selecting the option and letting time do what it does best.
If you ever want to talk about how reinvested dividends might affect your own portfolio or if you would like a second look at your broader investment strategy, I am always happy to connect. A short conversation can help clarify whether your current approach aligns with your long term goals and can offer peace of mind that you are moving in the right direction.