(If you want a quick guide for beginners how to start investing in the Philippine stock market, you can download your free ebook here.)
Below is one Stocks Update (sent last year Aug 2012) article discussing the second secret to building your stock market wealth.
Read on to find out that secret!
One day, Meg came up to me. She was a friend who joined the TrulyRichClub last year and started investing in the stock market.
“Brother Bo, I received a cash dividend from my BPI stocks! It isn’t much—just P3000+. But I’m happy. I can now buy that new blouse I’ve been eyeing to buy… Thanks so much for teaching me how to invest in the stock market!”
I asked, “Meg, do you want to be wealthy?”
“Of course. That’s why I joined the TrulyRichClub…” she beamed from ear to ear.
“So I presuppose that you already know the first secret to stock market wealth—which is to invest your small amounts every month without fail. Am I right?”
“Yes. And I do that faithfully!”
I asked her, “Do you want to learn the second secret to stock market wealth?”
“Of course. What is it?”
“Reinvest your dividends.”
Meg’s face looked like a little child whose ice cream cone has just been stolen by a thief. And the thief was me.
But I continued anyway. “Remember our rule? Never withdraw from your COL Financial
account. So whatever dividends a company gives you, just throw it BACK to the same company and buy more of its shares.”
“But that won’t be fun,” she pouted.
“I know. But that’s how to ensure your future wealth. Let me tell you about Dr. Jeremy Siegal. Remember him? I talked about him in one issue of our Stocks Update. Siegal did an extensive study of market returns from 1871 to 2003. Beyond a shadow of a doubt, he proved that the stock market is the best place to grow your money. Better than silver, gold, and real estate.”
She nodded, “I think I remember that issue…”
“He also discovered something very powerful which I didn’t mention in my article. Remember that there are two ways of earning money through the stock market. The first is via capital gains. That’s when the share price goes up. The second is via dividends—whether cash dividends or
“Yes. I read that from your book.
I’m a good student, you know.”
I chuckled. “Well, if you don’t add any money after your initial investment, Jeremy Siegel discovered that capital gains accounted for only 3 percent of stock market profits. But reinvesting dividends accounted for 97 percent of all profits.”
The woman’s eyes widened. “Huh?”
“It’s the power of compounding. The book, Triumph of the Optimists: 101 Years of Global Investment Returns, says that portfolios with reinvested dividends performed 85 times better than the same portfolio that didn’t reinvest their dividends.”
“Eighty-five times better?” Meg asked, shocked.
“Oh drats,” she sighed, “Why did I have to tell you that I earned dividends? I guess it’s bye-bye to the new blouse…”
I laughed. “Meg, I’m not saying you shouldn’t buy the blouse.
If your salary can afford it, then buy it. But don’t get it from your cash dividends. Or withdraw from the stock market. It might become a habit.”
“Amen. I hear you loud and clear.”
After talking with her, I did further reading on reinvesting dividends. What I found blew me away.
Market research firm Ibbotson Associates calculated U.S. Stock Market returns going back more than a century. Their study showed that if you invested $1 in giant U.S. companies in 1925, you would have $98 in 2005. But if you reinvested the dividends, your $1 would be $2,658!
I know my examples are unrealistic because no one lives for a hundred years. So let me shorten the timeframe.
If you invested $10,000 in Johnson & Johnson in 1989, you would have bought 126 shares. But if you reinvested your dividends into shares, your original 126 shares would become 2873 shares today. And your original $10,000 would be worth $180,682.
But focus on the fact that 126 shares becoming 2873 shares. That has nothing to do with how the company’s share price went up. By reinvesting your cash dividends and buying more shares, and compounding it over time, you grow wealthier.
This first seven months of the year, some of our SAM stocks gave you small dividends. Perhaps it was just a few pesos. That’s okay.
But the “small”, if compounded for 20 years or more, becomes very “big”. I hope you reinvested the money. If not, you know what to do the next time you receive a dividend.
Friend, move towards your multimillions!
Have fun investing (even your dividends)!
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