I have been considering adding one of the two major dividend ETFs (DVY or PEY) to my IRA portfolio. While the higher dividend yields usually result in lower appreciation of the price of the fund, the dividends can be reinvested automatically through my online brokerage, Sharebuilder.com. Dividend reinvesting is part of the magic of compounding and making your money multiply.
Suppose for example that you had 100 shares of a stock worth $10.00/share for a total of $1000.00. If the stock then paid out a $0.50/share dividend for a total of $50.00, your account would then be worth $1050.00 and you would own 105 shares. If the stock paid out another $0.50/share dividend you would then receive $52.50 and your balance would be worth $1102.50 and you would own 110.25 shares. Just for kicks, I thought I would go ahead and calculate the dividends over the next three years so you can get an idea of the power of dividends. Also keep in mind how this would grow exponentially over thirty years rather than three!
Initial Investment: 100 shares @ $10.00/share = $1000.00
Quarter 1: 105 shares @ $10.00/share = $1050.00
Quarter 2: 110.25 shares @ $10.00/share = $1102.50
Quarter 3: 115.76 shares @ $10.00/share = $1157.63
Quarter 4: 121.16 shares @ $10.00/share = $1215.51
Quarter 5: 127.61 shares @ $10.00/share = $1276.09
Quarter 6: 134.00 shares @ $10.00/share = $1339.90
Quarter 7: 140.70 shares @ $10.00/share = $1406.90
Quarter 8: 147.73 shares @ $10.00/share = $1477.25
Quarter 9: 155.11 shares @ $10.00/share = $1551.12
Quarter 10: 162.87 shares @ $10.00/share = $1628.68
Quarter 11: 171.01 shares @ $10.00/share = $1710.12
Quarter 12: 179.56 shares @ $10.00/share = $1795.63
Pretty impressive for a three year period, I'd say! Now of course, this is a purely hypothetical exercise (with some admittedly exaggerated percentages); but the point should be clear: good dividends plus dividend reinvestment equals exponential gains! Now this example also assumes that the share price remains constant. In actuality, in the long run a dividend ETF's share price should actually increase, thereby yielding even greater returns yet. The returns might not be as great as relying on funds that make use of capital appreciation alone, but there is something appealing about relying on good old fashioned compounding to grow your money. Like I said, imagine this over thirty years and also with additional shares being purchased from every paycheck! Powerful stuff!
Have I just convinced myself to add a dividend fund to my ETF portfolio in addition to the trifecta of ETFs I already own? We'll see how inspired I am next week when I set up my next automatic investment.