Compounding Effect of Dividend Reinvestment (as of 7/31/2010)

Chart of the Week for August 27 - September 2, 2010

The return on a security is composed of two parts — the change in the market price of the security and the value of any periodic income payments made by the security. While investors often focus on the change in price, the effect of income payments can be significant. For stocks, the periodic payment is dividends, and for bonds, it is interest.

The chart above illustrates the impact of reinvested dividends on the total cumulative return of a stock portfolio. In this example, the S&P 500 Index is being used as a proxy for a portfolio of large-capitalization U.S. stocks. Over the past year, dividends added over 2% to the total return of the portfolio. And over the last 10-years, which represented a difficult time period for stocks, dividends provided a cushion during the market decline and added over 15% to the total cumulative (not annualized) return.

When you invest in mutual funds through your retirement plan, dividends are typically automatically reinvested. For other accounts, you should carefully consider reinvesting dividends rather than receiving them as cash payments. As demonstrated above, dividends can significantly boost your portfolio return over time.

© Copyright 2010 ICMA Retirement Corporation, All Rights Reserved. The information herein was obtained from various sources. Although the information from third parties is believed to be accurate, it has not been independently verified by ICMA-RC. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. This information is intended for educational purposes only and is not to be construed as investment advice. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended here and should understand that statements regarding future prospects may not be realized. Investors should note that income from securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily indicative of future performance.