An important aspect of dividends is the effect of compounding. By reinvesting dividends, the earnings continue to earn. On top, the compounding effect increases as the time horizon lengthens, in an exponential way. 

When not reinvesting dividends, a $1 investment made using the S&P 500 on Jan. 1, 1930, would have grown to $115 by the end of December 2018. During the same period, a $1 investment with dividends reinvested would have yielded to $3,626.

The power of dividends reinvesting and compounding

The chart below shows the compounding effect for the S&P 500 over several time horizons. The compounding effect increases clearly as the time horizon lengthens. The annualized difference between the price return and the total return of the S&P 500 over every 10-year horizon is almost nearly 77%.

Compounding effect and time horizon

A more practical example is: An initial investment of $10,000 in 1970 in the S&P 500, would have been $294,641 by the end of march 2018 without reinvesting dividends and $1,237,828 with dividends reinvested.


the power of compounding

The compounding effect was already mentioned by Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. ”