Dividends, Investing, Quotes

When Harry met Sally he lost $94,378

By Kanwal Sarai
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Re-investing dividends will grow your savings much faster than if you spent your dividends. But how much faster will your savings grow?

John Heinzl wrote an article recently at GlobeAdvisor.com looking at a fictional portfolio for Harry and Sally.

"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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Showing 8 comments
  • The Wallet Doctor

    That’s a great illustration of the results of different strategies. Its important to understand the long term impact of actions which generate some immediate money.

    • kanwal

      Thanks for dropping by TWD. Investors have to find the right balance between re-investing or spending their investment income. There is no magic formula, it’s going to be a very personal decision.

  • Allan

    When Harry met Sally… I remember that I was a kid when that movie went out! 🙂

    Dividend investing is such a great strategy. I plan on buying canadian bank shares pretty soon. They make tons of money in bull and bear markets. Barrier to entry are high (it’s almost impossible to create a new bank in Canada). The canadian government protects them so it’s almost impossible for a canadian bank to go bankrupt.

    TD, Royal Bank and National Bank are my favorites and are solid investments.

    Thank you

    • kanwal

      Thanks for your comment Allan. I believe the dividend investing strategy is the best strategy for building long-term wealth. CDN banks have done well, but remember the key is to buy stocks when they are undervalued.

  • Erastus

    As a starter in investing field, I’ve learned a new lesson “re-invest regularly and don’t spend all the income generated from your investments”

  • kanwal

    Thanks for dropping by Erastus!

  • Ace

    That was a fun article to read, thanks for posting!
    Ironically I just recently increased my holdings of TD, finally going to utilize that DRIP! 100 plus years of paying dividends definitely makes me feel secure.

    best wishes


  • Michael

    Awesome post, thanks for giving an information. As a starter in investing field, I need more information.

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