Day 1: The Dividend Key – Reinvested Dividends

I thought I would kick the new year off with series of posts on why I have focused on investing in dividend paying stocks. There is scads of research out there that speaks to the benefits of a dividend based approach, and Tweedy, Browne Fund Inc. has put together a summary of these benefits and posted a pdf document which every investor should read. I think it is so important that I am doing a series of 6 posts that will present what I think are the most interesting findings from this summary. The findings I will present cover the root of my investing approach and why I am so passionate about this blog. Day 1 is going to look at the power of reinvested dividends.

Investment returns can come from a couple of different components, namely share price appreciation and dividends. Research that was conducted by Elroy Dimson, Paul Marsh, and Mike Staunton discovered that on a short-term basis (i.e. year to year), investment returns have come primarily from share price appreciation. However, when they looked more long-term, it was clear that investment returns were driven by the reinvestment of dividends. The chart below highlights their research:

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The interesting thing about this chart is it went broader than the US market and looked at the UK market as well. In both cases the benefits of dividend reinvestment is very clear.

Source: Tweedy Browne Company LLC (link opens a .pdf document)

(Photo Credit: daniel wildman)