What are Dividend and Dividend Yield

During July and 31 july each year, most companies announce their dividends. Although the dividend

payout may seem insignificant compared to the overall investment in shares, the average Dividend yield

(which compares the Dividend amount per share to the share price) hovers around 1%.

Because it constitutes only a tiny fraction of the total investment, this amount often goes unnoticed and

is easily mixed with regular monthly expenses. Investors tend to overlook it due to its small size. However,

what we fail to realize is that when we reinvest this modest Dividend amount in shares, it can have a

significant impact in the long run for two key reasons:

Divindent top two key reasons

1) The Dividend amount earns returns just like the rest of the portfolio, and

2) Fresh Dividend money is added each year.

Let’s assume an investor puts Rs 10 lakhs into an investment that yields a 15% annual return, with a

Dividend yield of 1%.

After 10 years:

a) His initial investment of Rs 10 lakhs grows to Rs 41 lakhs.

b) Reinvested Dividends bring in an additional Rs 4 lakhs, which is 9% of a).

After 20 years:

a) The initial investment of Rs 10 lakhs grows to an impressive Rs 164 lakhs.

b) Reinvested Dividends contribute Rs 28 lakhs, which is 17% of a).

After 40 years:

a) The initial investment of Rs 10 lakhs grows astonishingly to Rs 2679 lakhs.

b) Reinvested Dividends yield an impressive Rs 932 lakhs, constituting 35% of a).

Thus reinvesting dividends can lead to substantial growth in the value of your investment portfolio over

the long term. As the number of shares you own increases through reinvestment, any future dividend

payouts will be based on a larger shareholding, further accelerating your returns.

Where to invest the Dividend?

Since Dividends received every year are a small fraction of the portfolio value, it becomes difficult to

decide how to invest. One of the ways could be to rebalance your portfolio without adding new funds. If

certain stocks have underperformed, dividend reinvestment can help reallocate funds to potentially more

promising investments.

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