Dividend reinvestment is great! When choosing my current brokerage, dividend reinvestment was actually the deciding factor. One brokerage had dividend reinvestment, and the other didn’t. I chose the brokerage that had it.
What is dividend reinvestment? Let’s first look at what dividends are. Dividends are a part of the earnings that the company gives to it’s stockholders. For example, let’s look at Walmart. Walmart had earnings of $2.73 per share over the last year. They are paying out quarterly dividends at the rate of 67 cents per year. Walmart uses the rest of the earning to continue to grow. Since the stock price of Walmart is about $47.87 a share, the 67 cents dividend calculates out to an annual yield of 1.4%. Or .67 divided by $47.87 comes to about 1.4%.
So what is dividend reinvestment? Dividend reinvestment is where the dividends are automatically reinvested into the stock. So lets say I owned a 100 shares of Walmart stock. And at the end of the quarter, I got a dividend for about 17 cents (roughly 67 cents divided by 4). So I could either get a check for $17. Whoohoo! I could go to McDonalds! Yeah. OR, I could have that $17 automatically reinvested into Walmart stock! That $17 would buy about 0.355 shares of Walmart stock. One of the cool things about dividend reinvestment is that I don’t have to pay commissions of the stock purchased with the dividends. So following the dividend, I would now own 100.355 shares of Walmart stock! When the next quarter comes along, I would get another dividend. But this time I would be getting dividends for 100.355 shares of Walmart. So each quarter I would have just a little more stock than the previous quarter. And I would be earning dividends upon dividends, upon dividends. My Walmart stock would be slowly multiplying. That is why dividend reinvestment is so cool!