Five-Year Compounded Value of First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund Holdings

Compounding Returns

In a world obsessed with price movements of stocks, it's easy to lose sight of what those prices represent -- the value of holding a company's future profit potential. One of the key ways that profit potential turns into profit actualization in an investor's pocket is the dividend -- cash (usually) payments made to stockholders representing a portion of a company's retained earnings. Retained earnings is found under the shareholder's equity portion of the balance sheet and represents the amount of earnings a company has left over after paying dividends to its shareholders.

Before further discussion of why dividends can be impactful in the long-term, here's a plot showing how much of a difference reinvested dividends would make in one's five year holdings of NASDAQ:GRID compared to holding the dividends as cash and regular price appreciation.

The following plot shows three values over a five-year period: 1) The value of a $100 investment in GRID, with only price appreciation. 2) The value of a $100 investment in GRID, without re-investment. 3) The value of a $100 investment in GRID if dividends were immediately reinvested. 4) The value of a $100 investment in NASDAQ:SPY if dividends were immediately reinvested.

comp fig

How Does a Dividend Impact a Stock's Price?

A key thing to note is that dividends will be announced with an ex-date. This ex-date is the date on which one must be a holder of a share in order to receive the share's dividend. At the close of trading on that day, the effective value of each share may go down by the size of the dividend, because new purchasers will not hold the right to receive the dividend.

However, by the time the market opens the next day, the stock price could rebound up beyond its previous close, or continue to lag after the dividend rights have been rewarded. This uncertainty is simply due to broader market forces that exist on any day of trading.

GRID's Reinvested Dividend Value Compared to That Of Index ETFs

bar fig

The plot above shows the evolution of GRID's reinvested dividends compared to those for the popular SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust QQQ ETFs (which track the components of the S&P 500, and NASDAQ 100, respectively, and pay out dividends for the underlying securities). Note that the bars could not be below zero, as a reinvested dividend represents a fraction of a share of a company, and those shares cannot go below zero. Note, too, that the height of each bar for GRID, SPY, and QQQ represents the final difference between the green and red lines on graph number 1.

Finally -- what's the point of all this? The key insight to take from this article is to note how much value simply looking at the price chart of GRID's common stock misses if one's considering holding the stock for a long period of time. Dividends surely can matter.

You can check out Benzinga's dividend data here or in an enhanced view on Benzinga Pro

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