Reinvesting could make a big difference in how much money you eventually generate over your lifetime. It is one of the most important parts of creating wealth, but do investors do enough of it?
In April, the biggest proportion of interim dividends will be paid to shareholders, according to The Australian Financial Review. Some will get theirs by direct bank transfer or cheque, while others may take advantage of a company's dividend reinvestment program (DRP).
For those getting the cash, the age-old dilemma is the amount of dividends that should be reinvested. When you get the money, it is very tempting to use it for expenses or a special treat like a purchase or vacation.
However, unless you are just as diligent about reinvesting your dividends as you are about saving money to invest in the first place, you could seriously undermine your future wealth. The few extra hundreds or thousands of dollars you may receive in dividends each year can build upon themselves over many years.
The power of compounding interest is what does the heavy lifting in generating growing wealth. If you reinvest less, you may be potentially reducing the money you could have later on in your retirement. Over the long term, dividend income may make up about 40% of your portfolio's return, so be wise and reinvest.
In addition to reinvesting your dividends, choosing stocks with good track records for increasing dividend payments gives more juice to the power of compounding your returns.
For example, Flight Centre Travel Group Ltd (ASX: FLT) has given shareholders an annualised 18.6% total return over the past five years. During that time, it has more than doubled annual dividends. Currently, the stock pays a decent 3.8% yield fully franked. The travel reservations and holiday specialist is expanding overseas, so it has a long-term growth plan in place. That could keep the dividends flowing and growing as well.
SEEK Limited (ASX: SEK), the operator of the job search website seek.com.au, also has a strong history of raising dividends as its own earnings rise in the double digits. The stock yields 1.9% fully franked and the company is forecast to grow earnings around 20% annually on average over the next two years. Trading at around 31x forward earnings, it does have a premium on its share price, but the reliable growth prospects may be worth it for long-term investors. Dividends are forecast to rise in the double digits as well.
