Sometimes you need the right tool to measure something. I use various tools for measuring a piece of wood when I am working in my workshop. Just eye-balling the board to cut it about a foot long is usually not the best choice. The board will be too short or too long. Guessing doesn’t work. In the above illustration, it is very likely that you cannot accurately tell if line A-B is the longest, or if it is C-D. Your eye is sending information to your brain that might be misleading.
One powerful way to grow an investment is to automatically reinvest the dividends that the company pays in additional shares or partial shares of the company’s stock. This is called a DRIP where the letters D-R-I-P stand for Dividend ReInvestment Plan. If the company pays quarterly dividends, each quarter you have more shares of the company, and those extra shares earn dividends in the second quarter. This can be like a snowball rolling downhill, getting bigger and bigger every three months.
Let’s say you wanted to know if $10,000 invested in Apple (AAPL) was a better idea if you invested the money at the beginning of 2014 or if it would have been better to invest the $10,000 in Microsoft (MSFT). If I would have had to guess, I might have chosen AAPL. It just feels like AAPL has grown faster than Microsoft. But, using a calculator tool (on the link below), the answer is MSFT.
The tool is easy to use:
Step 1: Enter your dividend stock’s symbol AAPL
Step 2: Choose start & end dates I chose January 1, 2014 for the start date.
Step 3: Optionally, compare to another symbol or index. I chose MSFT.
Step 4: Click ‘Chart $10K Invested’ and see the hypothetical returns with and without dividend reinvestment.
An investment in either would have been a very good idea. By the way, both lines in the main illustration are the same length.