A thread on underestimated power of dividends.

MUST read for every young investors.

“If Albert Einstein was a young investor, he would probably be a dividend growth investor”

Let's say you work hard, save and buy a machine (a soda vending machine) for ₹100 that earns you 10% return every year.

As a result, after 1 year, you get an income of ₹10.

You, as an owner have the choice to take ₹10 home, or re invest it back in your machine to make it bigger so it can earn more next year.

Let’s say you decide to re-invest 60% of the earnings back and consume remaining 40%.

So the total value of your machine is 106.

This means, after two years, your machine now earned you ₹10.6 (106*10%) instead of 10 in first year.

Again, you decide to reinvest 60% and consume 40%.

So the value of your machine is now ₹112.36.

Until here, the math would look easy and obvious to many.
But the interesting part starts from here.

Many people think dividends are small and they don’t really matter.

But here’s the truth.

Read a tweet from @themotleyfool
https://twitter.com/themotleyfool/status/1300827059695030274

Quite interesting but it doesn't explain. WHY?
So here’s my answer & your explanation.

In the last 100 year, approx 40% of the stock market’s total return came from dividends.
And 60% from capital gains.

So what’s special about it?
It’s just 40%,
Still less than 60%, right?

I did some back calculation and here’s the data.

If you invest ₹1 and if it becomes ₹409 in 100 year that means you got a return of 6.2%
And if it becomes ₹23,216 times that means a return of just 10.57%

It's just a difference of almost 4% and see the difference in return.
Because every extra percent that gets added compounds in the long-term.

This is why instead of looking for short-term profit, the long-term compounding companies always wins.

While doing calculation, there was a point where I was getting a return of 13,780 instead of 23,216.

I realized I was using 10.00% as rate and not 10.57%. The decimal (00.57%) made difference.

Hence, many experienced investors talk about not overpaying on expense fees.

Companies are like machines (like your soda vending machine).
They take in capital and give us more capital (if it’s a good company).
That capital can be in the form of capital gain (increase in stock price) or dividends paid out in small amounts, which is often neglected.

When it comes to stocks, we’re the owners of those big machines (corporations) but with a tiny minority stake.
Hence, we may not get the choice to discuss and set the dividend payout ratio in the board meetings.

But what we do have in our control is the choice to re-invest it.
When you reinvest the dividend, you don’t make the company large but instead, you increase your ownership stake in the business.
And if it’s a good machine with high ROC, then you’d want to own more of it, right?

When you don’t re-invest dividends, then your long-term return is going to be far less than someone who's been re-investing it.

Because that small amount is sitting in your savings account yielding only 4% as compared to re-investing it and getting higher return.

Finally, here’s some Indian statistics.

From 1990 till today,
Gold offered 9% CAGR (it’s INCLUDING the jump of 65% in last 1 year due to COVID).

And equities (Sensex Index EXCLUDING dividends) offered 15%

₹1 invested at 9% becomes ₹13.27.
₹1 invested at 15% becomes ₹66.21.

That’s almost 5 times more in just 30 years. Remember, it’s without dividends.

Thank you.