The Real Power of Income Investing -- Reinvesting and Compounding

7 Reasons to Invest for Income -- Reason #7

Reinvesting earnings allows man to offer exotic drink

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Recall that in Reason 5 I mentioned Jeremy Siegel's famous chart documenting how much more the stock market yields than other investments.

I did leave out one small detail. Dr. Siegel's chart assumes that stock investors not only receive dividends, but also reinvest them in buying new shares of stock. This allows you to compound your returns exponentially.

Today you get a dividend (or interest -- this works with bonds as well, though not so dramatically) check.

You use the money to buy more shares of stocks or bonds.

Later on you get another dividend or interest check, but it's slightly larger than the first because it includes additional dividends or interest from the new shares of stock you bought with the first check.

Reinvesting Earnings so They Compound Over Time is the Simplest Way to Wealth

Start when you're young and continue until you retire -- and you'll retire rich.

In their book ALL ABOUT DIVIDEND INVESTING, Don Schreiber Jr and Gary E. Stroik give a fictional example of two brothers who're each given $10,000 by their father in 1944 when they're both 25 years old.

They both invest in large Dow Jones Industrial Average companies. Both of them keep the shares of stock through their life. But one brother reinvests his dividends and the other one spends them.

In 1944 they each receive $483 in dividend income from their stock (the Dow Jones yielded an average of 4.83% back then).

By the end of 2003, the brother who spent all his dividends had a stock portfolio worth $769,000, and it paid him $16,000 a year in dividends.

By the end of 2003, the brother who reinvested his dividends to buy new shares of stock had a portfolio worth $4.9 million dollars. And it paid him an annual income of $99,000.

That's the difference reinvesting makes.

Albert Einstein allegedly called the reinvesting of compound interest the Eighth Wonder of the World, or the Greatest Force in the Universe.

This is the end of these lessons. Hopefully I've opened up your eyes to the power of income investing.

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