Originally Posted by marko
I think the idea is that as you reinvest in more shares you are making the pie bigger. Instead of 5000 shares you suddenly have 5250 shares which, in a good market will make you even more money (and more dividends).
This might work if you're in the accumulation phase or don't need all your dividends to live on but the key is "a good market", so short term can be a loser if you need the cash sooner than later. Taxes can be another factor as you do end up paying extra (but not quite twice) as those dividends grow and generate even more income.
As Einstein said "the most powerful thing in the world is compounding interest"
in reality the number of shares from reinvesting dividends really does not give you more than you had dollar wise assuming the same total return vs no dividend ..
all profits are on the amount of dollars invested not number of shares that make up those dollars .
if you have 100k invested and get a 10% return you have a 110k .
if you have 100k invested and get a 10% dividend then you have 90k invested the next morning at the open to be compounded on by markets over the new quarter and a 10k dividend .
if you do not reinvest the 10k then all you have compounding at the ring of the bell is 90k . if your investment goes up 10% it is on only the 90k you started with not 100k .
if you reinvest the 10k you have your original 100k being compounded on by the markets at the ring of the bell for the next quarter . you have the same 10% gain on 100k as before .
folks get confused here because they have more shares but number of shares does not matter . all that counts is the dollars being compounded on at the ring of the bell kicking off the next quarter .
exchange computers have to reduce the bids automatically down to offset the dividend giving you the same dollars you had at the close prior . . your share price plus dividend = just what you had prior the reduction and payout .,
in the end total return is the same regardless of how many shares if the amount in dollars compounded on and total returns are the same .
a 10% total return does not care if it is 10% capital appreciation or 5% dividends reinvested and 5% capital appreciation .
at the end of the day all that counts is i started with x in value and ended with y in value .