Dividend and Compound Investing

Dividend and Compounding Investing

There are many different types of strategies you can use in share investing.

Often the first image that comes to mind is sitting in front of a computer screen and watching numbers ticking over at a rapid pace hearing buy, sell, sell, buy. That tends to be trading and is a strategy best left until you are more skilled with shares and investing.

Some will think of mega share investor, Warren Buffett, whose strategy is based around value investing. Analysing companies and looking for ones that are undervalued, have monopolies and exceptional prospects.

But, for the new to shares investor the simplest and less risky form of investing is buying dividend shares and using the compounding effect to accelerate returns and income.

What is dividend investing?

Dividends are the interest received from an company in exchange for holding their shares. Companies will pay dividends once a year, twice a year, 3 times a year, 4 times a year or 12 times a year. There are some companies who pay no dividend at all. For dividend investing, look at companies that pay either 4 times a year or 12 times a year.

When companies pay dividends more frequently you can accelerate the yield return through reinvesting the dividends. For example, one of my favourite shares has a fairly stable yield average around 7.17%. It pays dividends on a monthly basis. By reinvesting the dividend every month, this allows more shares to be bought each month and subsequently more dividends to be paid. Calculating the yield over 12 months produces a return of 8.12%.

This strategy works particularly well when the dividend is paid on a monthly basis.

Quarterly dividend paying shares also offer higher returns but not as spectacular as monthly dividends. With the above example the yield would be 7.4% based on the return for this particular share if paid quarterly rather than monthly.

Dividend investing is a simple strategy which with patience can provide exceptional returns.

Compounding Effect

Imagine a hockey stick. It is flat on the ground level, curves gently, then goes almost straight up to the handle. The hockey stick is a perfect example of what a compounding effect chart would look like.

When investing in shares the return is low to start with. Then returns increase and create the gentle curve. Finally, returns grow exponentially creating the handle effect.

Albert Einstein described compounding interest as the 8th wonder of the world. He said “he who understands it, earns it. He who doesn’t, pays it” sadly very few have the patience to allow the compounding effect to grow to the exponential returns possible and earn financial wealth.

Combining dividend investing with the compounding effect and you build a powerful combination of strategies which can produce incredible results in the shortest possible time.

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