In a recent article by Norman Rothery, PhD, CFA and founder of StingyInvestor.com, he suggests if you can you should reinvest your dividends to take advantage of the compounding factors.

If you own a credit card, and financial institutions are offering them as the consumer wishes to spend, then you will be aware what happens if you carry a balance. Given the majority of consumers carry balances, if you do not carry one, talk to someone who does. The interest quickly doubles the cost of the purchase. We all accept that is how credit cards work, the compounding is a fact of life. If you are investing you want the compounding to work for you.

Mr. Rothery examined the data collection by Professor Robert Shiller work at the S&P 500 from 1990 to 2019. Buying the index would have given you an annual 7.6% return not including dividends. If you reinvested your dividends the return jumps to 9.8%. In terms of dollars, to make it easier using $100,000. The money would grow to $891,000 without dividends or $1,655,000 reinvesting. If it was $10,000 then $89,100 or $165,500. The risk was investing in the S&P 500 Index.

If you do not reinvest your dividends, a reasonable alternative can be 3 month Treasury bills your money would grow to $252,000. If you used the money to pay bills, hopefully you are debt free. The idea is to think about total return, not just annual return.

In today’s investment options, it is easier to reinvest your dividends in the big market indexes and mutual funds.

Linking to dividend paying stocks, the example Mr. Rothery used from Professor Shiller suggests reinvesting your dividends adds 1.5% to your return. Given the low risk, good compounding and if the company can not pay a dividend the fund does not own it, if you can it is a good idea to reinvest your dividends and let compounding work for you