The Power of Dividend Reinvestment
A stock's price return may get all the attention, but it's a stock's total return—which includes reinvested dividends—that investors should really pay attention to.
For example, a hypothetical $100,000 investment made in 1990 in a fund tracking the S&P 500® Index would have been worth more than $2.1 million by the end of 2022 had dividends been reinvested—but only $1.1 million had they not.
"Reinvesting dividends is nearly effortless," says Steven Greiner, managing director of Schwab Equity Ratings® at the Schwab Center for Financial Research. "Once you set it up—which generally involves simply ticking a box—there's nothing more to do but sit back and let compounding work its magic. Be aware, however, that companies can reduce or stop paying dividends."
Dividends vs. total returns
Reinvesting dividends can boost your overall returns; however, if it's dividends alone you're after, you might consider taking a sector-by-sector approach. Over the past two decades, some of the highest payers, such as the communication services sector, have generated the lowest total returns, whereas some of the lowest payers, like information technology, have generated the highest total returns.
Click to expand the image.
Sources: Charles Schwab (top chart). Bloomberg (bottom chart).
Top chart: Data from 01/01/1990 through 12/31/2022. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product, and the example does not reflect the effects of expenses, taxes, or fees, and if it had, performance would have been substantially lower. Past performance is no guarantee of future results.
Bottom chart: Data from 12/31/2002 through 12/31/2022. Image is for illustrative purposes only. Past performance is no guarantee of future results.