It is widely know that dividends are much more stable than stock prices. You do know that, don’t you? Stock prices vary widely, and can swing wildly even within a few hours or days. Not so with dividends.
Stability
Dividends are generally stable. The don’t change anywhere as nearly as stock prices do. Dividend stability comes from their steadfastness. When there is change, it is usually mild.
Reality
Companies vary regarding dividends. Some companies pay no dividends at all. Some companies increase their dividends every year. Some companies keep their dividends the same for years. When business conditions deteriorate, some companies will reduce or eliminate their dividends. Some companies increase theidividends every year. With sufficient diversification, one can expect increasing dividend income because many companies will fall in to the “increase dividends every year” group. Pick a good group of companies and you can expect rising dividends.
But Wait, There’s More
The story gets better. In addition to receiving dividends, it is the use of the dividends one receives that have the power to make a difference in one’s life. Some people receive their dividends, and use that money for expenses or after accumulating some money will purchase more stock. Then there are people how set up their stock accounts for “dividend reinvestment.” This simple process then purchases new shares (or portions of a share) from the issued dividends.
What’s In A Name
It has many names. A common one is DRIP (dividend reinvestment program). Each dividend issued is used to purchase additional shares in the company that issued them. This method is a simple, easy, and straight-forward way to increase one’s stock holdings. Over time, this method is used to create wealth automatically. Every time a dividend is issued, one is assured that their share count increases.
One of the best part of this process is that it happens automatically. No further intervention is needed. No need to remember to do something on a specific date. It is low maintenance.
How Much Increase?
Of course, the amount of one’s share increase by the use of dividend reinvestment depends on several factors. The price of the shares at the reinvestment date, the amount of the dividend that was issued. Since the amount of the dividends depends on the number of shares one holds in the company and the rate of dividends per share and the price at which the new shares are purchased, the full rate of increase over time varies. As we have seen, the dividend rate is subject to change and the stock price changes daily. As a result, the trajectory of increase in one’s holdings cannot be exactly known in advance. However, over time, one’s holdings increase, and likely the value do as well.
Over the course of several years, the general trend is to receive increasing dividends which causes one to own an ever-increasing number of shares. This is a simple way to increase one’s wealth.
The illustration is from William Elliot Griffis’ Korean Fairy Tales (1922). East Light flees with his warriors, and the fish provide a way for them to escape.
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