How to Use a Dividend Reinvestment Calculator

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Contributor, Benzinga
December 20, 2022

Dividend investing is a long-term strategy that capitalizes on compounding. While a dividend portfolio can produce strong cash flow in 10 to 20 years, it’s easy to get discouraged in the moment and seek riskier investments with higher potential returns. Dividend reinvestment calculators put dividend growth into a deeper perspective. These tools let you see how your money can grow over decades and inspire investors to stick with this long-term approach. This article outlines how to use a dividend reinvestment calculator to assist your efforts and provides some dividend investing tips.

What Are Dividend Reinvestments?

Many companies give out dividends to their shareholders, but not everyone needs the cash right away. Some investors prefer buying additional shares with their dividend distributions. You can have this reinvestment happen automatically, so you don’t have to spend as much time in your portfolio. Most companies that issue dividends also have dividend reinvestment programs that make this process easy. Dividend-paying companies give fractional shares to their investors when their distribution doesn’t cover an entire share.

Each dividend reinvestment increases your next payout. Dividend distributions are based on the company’s dividend payout and the number of shares you own. Buying more shares through reinvestment helps you obtain more shares in the future. Dividend investing is a numbers game that rewards investors for accumulating shares and holding onto them.

How to Calculate Dividend Reinvestment Returns

You can calculate dividend reinvestment returns with the interest formula. The formula is adjusted below to match dividend reinvestment returns:

Dividend reinvestment returns = principal x dividend yield ^ time in years

Assume you invest $10,000 that averages a 3% yield over 10 years. The formula would become the following:

Dividend reinvestment returns = $10,000 x 1.03 ^ 10 = $10,000 x 1.344 = $13,440

Under this scenario, you would gain $3,440 over 10 years. But this calculation does not include dividend reinvestments or personal contributions to your portfolio. Both of these funding sources would increase your total returns.

Should You Reinvest Dividends?

Reinvesting dividends is usually a great choice. You can have this process happen automatically, and investors who reinvest generate more cash flow in the long run than people who do not reinvest dividends. Dividend reinvestments may not make as much sense if you need the cash flow to cover expenses or have a high concentration in one of your dividend stocks. In the latter scenario, some investors may take the cash distribution and invest it into other dividend assets to diversify their portfolios.

Tips to Build Your Dividend Portfolio

Knowing the dividend reinvestment formula and performing calculations won’t grow your portfolio. It can serve as inspiration, but you’ll have to put in the work to reach your portfolio goals. Having more capital lets compounding do more of its magic. In the previous example, $10,000 turns into $13,440 in 10 years, netting an additional $3,440. If you started with $100,000, you would end up with $134,400, generating $34,400 instead. The more you grow your portfolio, the more it will work for you. These tips can help you get started.

Avoid High-Risk Assets

Growth stocks can produce higher returns than dividend assets, but those same stocks take a beating during corrections and market volatility. Many of these same assets do not offer dividends because they have negative earnings. These companies only rise because enough investors believe in the growth narrative. Any cracks in the growth narrative can send a growth investment spiraling downward. Keeping your eyes on the prize and investing in cash-flow-producing assets lets you build your portfolio over time with fewer headaches. Every asset has a degree of risk, and not all of them are worth pursuing.

Trim Your Expenses

Increasing your monthly portfolio contributions accelerates the compounding, but expenses get in the way. You can’t live without some expenses, such as food and shelter. But if you have never reviewed your expenses before, you may find unnecessary items that are depleting your finances. You may find an unused subscription or decide you can live without certain things. Trimming your expenses now gives you more flexibility to grow your portfolio and retire sooner. Lowering your monthly costs will also reduce your cost of living, making it easier to retire.

Grow Your Career

The best way to grow your portfolio is to make more money. A higher income makes an investor less prone to risky investments and lets them see the full picture. Some investors pursue side hustles to increase their portfolios, while others seek higher-paying work. You can optimize your portfolio and target cash-flow-producing assets that have less risk. Even with this research, you cannot control how your assets perform, but you will have more control over your income. You can develop high-paying skills and explore new opportunities that put you in a better position.

Give REIT Investing a Try

Real estate investment trusts (REITs) are assets that give you exposure to several real estate properties for a fraction of the cost. Fractional positions of single-tenant commercial properties and additional REITs typically have higher-dividend yields than traditional stocks. Elevate.Money has a 6.5% yield built on a stable business model (tenants with five- to 20-year leases). It’s challenging to find yields like these with traditional stocks. REITs also let you hedge against inflation because real estate is a tangible asset with a limited supply.

Elevate Your Dividend Returns

Each dividend reinvestment and personal contribution puts you in a stronger financial position. Reviewing your income and expenses can reveal insights that make it easier to contribute at a higher level. Getting a high yield on a stable investment is the icing on the cake, and real estate investing platforms can help!

Platforms like Elevate.Money provides investors exposure to commercial real estate owned by U.S. corporations like Shell plc and Family Dollar Stores Inc. Some businesses have operated in these buildings for over a decade, creating stable long term cash flow investments. As you do so, you will find that you can plan for future income hedge against risk and continue to build your portfolio slowly.

Frequently Asked Questions

Q

Is dividend reinvestment a good idea?

A

Reinvesting dividends lets you compound wealth and increase your cash flow. It can generate meaningful, long-term returns, and you can have these reinvestments happen automatically on numerous investment platforms.

Q

Do you get taxed for reinvesting dividends?

A

You will get taxed regardless of whether you accept the dividend as cash or reinvest it. If you have your dividend stocks in a Roth IRA, you won’t have to pay taxes on the dividends.

Q

Do dividends count as income?

A

It depends on how the dividend is classified. Ordinary dividends count as income, while qualified dividends get taxed at a more attractive capital gains rate.