Sunday, March 22, 2015

Time and patience (and dividend reinvestment spreadsheet)

Hello, this is Div4son.


The other day, Mr. Passive Income Pursuit commented that you need need lots of patience and time for dividend growth investigating to work. 

This is correct - but why?

The experienced ones will immediately say compounding and dividend reinvestment etc. It takes a few years for these effects to be noticeable. 

The answer again is correct, but like my old math teacher said we need be see some proof. 

So, this is my attempt at some math. 


Note: this is a simplistic view. In the real world, things are far more complicated. 

1) dividend growth



There is a time component here which provides a compounding effect. 

One year will not show for much. 

Over the years, assuming you picked high quality companies, your dividends from your investments will increase even if you don't reinvest. 


2) dividend reinvestment

We are increasing the number of shares with dividend investments which supercharges the compounding. 

As you can see, we are using the power of time - literally. If we increase this number (number of years), we increase the original and the reinvestment. 

Again, one year won't show for much. But, if you can wait it out, then the numbers are substantial.

If you use t=20 years, then this is quite significant. 

Example:

Let's use the buyupside website, you can play with different scenarios.

http://www.buyupside.com/calculators/dividendreinvestmentdec07.htm

Let's use the following assumptions:

Price100
Share #100
price growth5.00%
div5
div growth5.00%

With 1 year, not much to write home about:



With 20 years, now we're talking!





I used google sheets to do the same. The advantage is that you can see the plots over time. 

You can get my google reinvestment sheet and play with it.


The key here is that you need to be patient while your quality investments grow over time. 

During the period, the principle will go up and down

However, since you are increasing your shares by reinvesting (in same or new companies), your dividends should be increasing. 

Update of my Strategy = 
High quality companies + high yield + dividend high growth + time (and patience)

That's all for today

Div4son


2 comments:

  1. Very nice explanation! Do you use DRIP on your investments?

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    Replies
    1. My brokerage allows for DRIPs which is what I am doing now since the account is relatively small. I may change this approach when my account is larger. Also, I haven't determined if drip or non drip is more advantageous for reinvestments.
      D4S

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