But dividends are crucial to building wealth.
Let's say we own 100 shares each of two companies. Both are valued at $20.00 per share. One pays a quarterly dividend with an annualized yield of 3% while the other pays no dividend.
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Using a Dividend Reinvestment Calculator, it is easy to calculate the benefit you'll get from dividends that are reinvested.
If both of our stocks grow at an average annual return of 6% for 30 years, the company without a dividend will be worth $11,486.98 at the end of that period.
That might seem acceptable until you see how much you made in the other company after reinvesting the 3% dividend every year.
The value of the dividend-paying company after 30 years would be $83,353.98.
Huh? How can that be, you ask?
You see, when you reinvest the dividends you buy more shares. So every quarter you are increasing the number of shares you own and also the amount of income you are receiving...
...which means you are buying more and more shares every quarter. This is a vivid demonstration of the benefit of compounding.
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In our example, we started with 100 shares of each stock. After 30 years, we still had 100 shares of the stock that doesn't pay a dividend while we ended up with 725 shares of the stock that does pay a dividend.
More shares means more money...
And while the second stock also grew at 6% per year, the reinvested 3% dividend boosted its average rate of return to 13.24% - more than double that of the other company.
This is really important for all investors to understand. But if younger investors get on board early, this can really make a big impact for them down the road.
Just by making sure that the stocks you buy pay dividends and that you have those dividends reinvested in more shares, you can significantly improve you investment performance.
Think about that. In our example, the average rate of return was double but that doesn't translate into you having twice as much money; it translates into you having a pile of money many times bigger.
This brings me back to Facebook.
Oftentimes IPO stocks are unproven. In Facebook's case, that was certainly so and after going public a company's books essentially become public record a public company can't hide behind excitement and perception.
But companies that pay dividends are usually well-established companies with track records to consider. They are often reliable businesses that may not grow super-fast but will grow consistently and pay that all-important dividend.
Will Facebook be like Google or Apple in the coming years? Maybe. And I'm not saying it won't.
But I don't know if it will or not.
I can be more certain where other companies may be down the road and confident in estimating what the positive benefit of owning them will be for me and my financial future.
Your portfolio should have stocks in it that have the potential for tremendous growth like Facebook might.
But don't ignore dividend paying stocks. You just might wake up in 30 years and discover that the best investment you ever made was a bunch of boring dividend paying stocks.
Steven P. Orlowski is a financial services industry veteran who has served in a variety of capacities including financial planner, portfolio manager and trader. He brings a wealth of hands-on experience and industry insider perspective to his analysis and commentary. In addition to being a Certified Financial Planner he has held the following licenses: FINRA Series 7, 9, 10, 63, and 65 and various state Life and Health Insurance licenses.