Building a solid retirement plan requires foresight and planning over the long term. However, one of the primary reasons so many people postpone their plans to build wealth is the need to put aside cash each week to keep their investments growing.
Contributing cash into a savings plan each week is fine if you have plenty of disposable cash, but even the best plans can fall by the wayside if you’re on a budget with other repayments and bills to think about. If all your income goes towards paying your expenses to survive financially today, how can you possibly find additional cash to put towards investing for the future?
Fortunately there are a number of ways to build your wealth without having to spend any money to see your investments grow. You could choose to leave your savings in the bank earning interest. You could choose to wait for the value of your home to increase while you focus on repaying your mortgage. Alternatively, you can set your stock portfolio to grow automatically.
Drip Feeding Your Investment Portfolio
When you purchase stocks on the stock market, you’re buying shares of ownership in a publicly listed company. Each individual share you own entitles you to a portion of the company’s profits each year, which are known as dividends.
Many investors choose their stocks based on the dividend yields paid to them each year with the aim of supplementing their income. However, you don’t have to take your dividends in cash if you don’t want to. You can choose to reinvest your dividends each year instead.
The company works out how much cash you should have received for your dividend payment. Instead of giving you the cash, they convert the amount due into shares. So if your dividend payment was $100 and the price of the individual stock is $50, you would receive 2 extra shares.
The additional shares are added to your portfolio without you having to pay any stock brokerage fees or trading fees, so you automatically save money. The value of your investment portfolio increases and you gain ownership of extra shares that yield more dividends for you.
Calculating the Effect of Dividend Reinvestment
For the purpose of this example, let’s assume you’re going to start your investment portfolio with $5,000 in cash. You purchase 100 shares at an initial stock price of $50 per share. The company pays you $3 per share as your annual dividend.
While you’re researching which stocks to buy you learn that the company’s annual dividend growth rate is anticipated to be approximately 4%. You also determine that the stock price sees an annual growth rate of 5%.
If you input your figures into a good dividend reinvestment calculator you can work out how much your initial investment will grow on its own. You’re also able to see how your portfolio grows without the need for you to contribute any cash along the way.
|Initial Number of Shares||100|
|Initial Stock Price per Share||$50|
|Annual Dividend per Share||$3|
|Annual Dividend Growth Rate||4%|
|Stock Price Annual Growth Rate||5%|
|Number of Years Investment Held||10|
Dividend Reinvestment Calculator Results
|With No Dividend Reinvestment||With Dividend Reinvestment|
|Total Portfolio Value||$11,890.38||$14,170.43|
|Number of Shares Owned||100||174|
In the example above, you can see the value of your initial investment has almost tripled. You can also see that the number of shares you own has increased without requiring you to spend your income purchasing more stock.
Of course, you have the option to switch your dividends back to paying you in cash at any time. You can use your dividends to boost your income or put the money towards other investments. Alternatively, you might decide to sell your entire portfolio and use the cash for other purposes. The key is to grow your wealth wisely to give you plenty of options once you reach your goals.