Compounds and Dividends



Nilus Mattive explains how the effects of compounding are equally powerful as dividends are. Mr. Mattive discusses reinvesting uses both compounding and dividends.

It's no secret that Mattive considers dividends one of the best wealth-building tools in the world of investing. But he also considers the effect of compounding to be equally powerful. Compounding takes time, as the money that's been already earned on investments begins to earn returns of its own. For example, if $10,000 is put into a savings account with a 6% annual interest rate, $10,600 will be the result after one year. The following year, the investor will be earning 6% on the $10,600 rather than just the original $10,000.

With dividend reinvestment, both concepts are being combined into one force. As various studies have proven, dividend reinvestment is responsible for much of the market's historical performance. Asset management company Eaton Vance says as much as 65% of U.S. stock gains have come from reinvested dividends. And when Mattive worked for Standard & Poor's, the company did a study that sliced and diced the S&P 500 stock index.

Over a 20-year period, capital gains would have produced a 381.9% gain. Not bad. But reinvesting dividends would have turned that gain into a 905.1% windfall.

Hundreds and hundreds of companies are more than glad to help long-term investors buy additional shares with their dividends, so they've created Dividend Reinvestment Plans (or DRIPs) to make the process easier. Here are some pointers on DRIPs:

-    In some cases, the company runs the plan itself. Most times, however, the plan is run by an independent agent.

-    While a few plans allow an investor to buy their initial stock directly, most require the investor to be a current shareholder.

-    Many plans also allow investors to buy additional shares with their own money; and some will even automatically deduct a set amount from checking or savings accounts at predetermined intervals.

-    A select number of plans even allow an investor to purchase shares at a discount to the stock's current market price.

"Investors can also find much of the information on third-party websites. One very useful site is www.computershare.com. This company acts as the plan administrator for hundreds of DRIP plans and their website allows searching by company name. Another valuable resource is www.moneypaper.com which offers many of the same features," Mattive states.

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About NILUS MATTIVE & MONEY AND MARKETS     

Nilus Mattive, a financial analyst at Weiss Research, is the editor of Dividend Superstars, a monthly publication and is also the editor of the company's daily e-letter, Money and Markets. Formerly a senior editor of Standard & Poor's The Outlook, the oldest continuously published investment newsletter in the country, he has written for a number of investment websites, including BusinessWeek and Individual Investor. Mr. Mattive is the author of The Standard & Poor's Guide for the New Investor (McGraw-Hill, 2004) and has appeared on the popular investment radio show, Traders Nation, to discuss his views on personal finance.

Mr. Mattive graduated cum laude from the University of Scranton.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.





Compounds and Dividends