Re-investing dividends will grow your savings much faster than if you spent your dividends. But how much faster will your savings grow?
"Consider two investors, whom we'll call Harry and Sally (my age is showing, I know).
On Dec. 31, 1993, each invests $10,000 in shares of Royal Bank of Canada. They hold their shares for the next 20 years, the only difference being that Harry spends his dividends while Sally reinvests the quarterly payments in additional shares of Royal Bank.
Now, it's obvious that Sally will come out ahead. After all, she's not spending her dividends like Harry is. But the magnitude of the difference may surprise you.
At the end of 20 years - on Dec. 31, 2013 - Harry's $10,000 investment will have grown to $98,923, according to Bloomberg calculations. That sounds impressive, until you compare it to Sally's investment. It will be worth $193,301 - nearly twice as much as Harry's. On an annualized basis, their returns work out to 12.1 per cent and 15.9 per cent, respectively.
Why is Sally so much further ahead? Not spending her dividends is certainly a factor, but it's what she does with those dividends that really turbocharges her wealth. Every new share she purchases produces additional capital gains as Royal Bank's stock price rises. What's more, each new share spins out even more dividends, which in turn purchase additional shares. And so on."
As you can see Sally ends up with $193,301 versus $98,923 for Harry. The lesson here: re-invest regularly and don't spend all the income generated from your investments.
Bonus, here's what Mr. Heinzl had to say about Canadian Banks:
"I like Canadian banks for several reasons. They make obscene amounts of money. They have their tentacles in every corner of our economy. And they don't face a lot of outside competition. What's more, they're well-diversified, with corporate and personal lending, wealth management, investment banking and insurance operations all contributing to the bottom line.
And, of course, they pay attractive dividends that rise over time. Like Sally, I intend to reinvest those dividends to maximize my returns."
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