INV101 Why must we reinvest the dividends?

When we invest our savings by buying company shares, we are looking for two types of companies. The first is one that will give us good dividend yield and rate, and the second is one that is in the growth stage. I will only touch on the former, as the second type is more complicated and riskier.

Let us go back on why we want to invest our savings instead of the leaving them in fixed deposits or savings account. Like I said in previous post, when we have decided to buy company shares, we are looking at double digit growth in our savings. Here's how.

1. Look for a company that gives consistently high dividend rates, at least 6%.
2. Buy the company's shares, at least $10,000 worth.
3. Upon receiving dividends, buy more of the company's shares.

I will just use Cerebos as an example here.
Janice bought 10,000 Cerebos shares at $1.20 per share. She had invested $12,000 in December 2002.
She received dividend of $0.129 x 10,000 = $1,290 in March 2003. Then she bought an additional 1,000 shares at $1.26 per share and own 11,000 shares. She continued to do this until now.

For the past 9 years, her initial investment of $12,000 has reached $119,500. Her initial investment has grown at a rate of 29.1% per year, compounded for the past 9 years. This is illustrated in the table below.

Year	Number of shares	Dividend	Buy number of shares	Price	Remaining Cash	Value
2003	10,000	$1,290	1000	$1.26		$13,890
2004	11,000	$1,760	1000	$1.70		$20,460
2005	12,000	$3,000	1000	$2.00	$1,000	$27,000
2006	13,000	$3,500	2000	$2.20		$32,100
2007	15,000	$3,750	1000	$2.40	$1,350	$39,750
2008	16,000	$4,000	2000	$2.68		$46,880
2009	18,000	$4,500	2000	$2.24		$44,820
2010	20,000	$5,000	1000	$3.50	$1,500	$76,500
2011	21,000	$6,720		$5.30	$8,200	$119,500
					Rate of Growth	29.1%

If she were to hold on to the dividends instead of reinvesting, her initial $12,000 has grown to only $74,278. That is only a rate of 22.5% per year compounded for the past 9 years.

Year	Number of shares	Dividend	Buy number of shares	Price	Remaining Cash	Value
2003	10,000	$1,290	0	$1.26	$1,290	$13,890
2004	10,000	$1,600	0	$1.70	$2,890	$19,890
2005	10,000	$2,500	0	$2.00	$5,390	$25,390
2006	10,000	$2,688	0	$2.20	$8,078	$30,078
2007	10,000	$2,500	0	$2.40	$10,578	$34,578
2008	10,000	$2,500	0	$2.68	$13,078	$39,878
2009	10,000	$2,500	0	$2.24	$15,578	$37,978
2010	10,000	$2,500	0	$3.50	$18,078	$53,078
2011	10,000	$3,200		$5.30	$21,278	$74,278
					Rate of Growth	22.5%

You can see from the two tables above that a 6.6% difference is actually $45,000 difference in 9 years. A 29.1% per year compound interest is much more than the 5% to 9% that your fund manager can promise you. It is always good to spend some time to do research on the companies that you are interested to invest in and rake in the good returns that nobody can promise you. 

Why let the fund managers take a cut from your earnings when you can earn 20% more yourself?

Happy investing and cheers.

Disclaimer: This post serves as a reference for potential investors. All investments involve risks. Readers are advised to exercise their own discretion when investing.