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In my opinion, investing in dividend stocks is a great way of creating an additional income stream. But they can also play a part in building wealth.
To do this, it’s necessary to reinvest any cash received and buy more shares. This is a process known as compounding. And in my opinion, it’s an effective way of increasing the value of a portfolio.
This is best illustrated by way of an example.
Some numbers
Let’s assume an investor has £10,000 of shares yielding 3.6%. Each year, this would provide income of £360. Over 30 years, this would generate £10,800 of dividends and, assuming there was no capital growth (or losses), the original £10,000 would remain.
Alternatively, if the £360 received in year one was reinvested, in the second year it would grow to £373. Repeat this again and, in year three, the income received would increase to £386. And so on…
After 30…
