Price return against total return on one lump sum, with the dividends taken as cash and reinvested, over four horizons and three yields.
On these illustrative figures, reinvested dividends account for roughly half of a 30-year gain. At an illustrative 5 per cent a year of price growth and a 2 per cent dividend yield, 10,000 grows to 43,219 on price alone over 30 years, 56,507 if the dividends are spent, and 76,123 if they are reinvested. The yield is 2 of the 7 points of return, but it produces 49.8 per cent of the gain.
Worked in full in Stock Market Investing for Beginners by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The reason is that a reinvested dividend buys more shares, which pay their own dividends and grow with the price. A dividend taken as cash stops compounding the day it is paid. The arithmetic below separates the two, so you can see how much of a long-term result is price and how much is the income you chose to leave in.
| Input | Value |
|---|---|
| Amount invested once | 10,000 |
| Price growth a year | 5.0% |
| Dividend yield, on the value at the start of each year | 2.0% |
| Total return if dividends are reinvested | 7.0% |
| Years held | 30 |
| Fees and tax | none (tax tested below) |
None of these figures is a forecast. Real returns arrive unevenly; a steady rate is used only to make the mechanism visible.
Price-only value = amount × (1 + price growth)years
= 10,000 × 1.0530 = 10,000 × 4.3219 = 43,219
Excel: =FV(5%, 30, 0, -10000)
In year 1 the holding pays 2 per cent of 10,000, or 200. Because the price grows 5 per cent a year, so does the dividend: the payment in year 30 is 200 × 1.0529 = 823. Added up, the thirty payments come to:
Cash dividends = yield × amount × ((1 + g)n − 1) ÷ g
= 0.02 × 10,000 × (4.3219 − 1) ÷ 0.05 = 13,288
Holding plus cash received: 43,219 + 13,288 = 56,507
Reinvest the 200 at the end of year 1 and the holding is 10,500 + 200 = 10,700: a 7 per cent year. Every later year works the same way, so the growth rate is simply price growth plus yield.
Total-return value = amount × (1 + g + yield)years
= 10,000 × 1.0730 = 10,000 × 7.6123 = 76,123
Excel: =FV(5%+2%, 30, 0, -10000)
| Outcome | Value | Gain on 10,000 |
|---|---|---|
| Price only | 43,219 | 33,219 |
| Price plus dividends spent | 56,507 | 46,507 |
| Dividends reinvested | 76,123 | 66,123 |
Reinvesting adds 32,903 over price alone, and 19,615 more than the same dividends taken as cash. That 19,615 is pure compounding: dividends on reinvested dividends, and the price growth on the shares they bought. Of the 66,123 gain, 32,903 or 49.8 per cent traces back to dividends, although the yield is only 28.6 per cent of the 7 per cent return. The final year shows why: the cash investor's year-30 dividend is 823, the reinvesting investor's 1,423.
The final reinvested value is 1.76 times the price-only value. Over long periods, a chart of an index level understates what a holder of the index actually earned by a wide margin.
| Years | Price only | Price plus cash dividends | Reinvested | Dividends' share of gain |
|---|---|---|---|---|
| 10 | 16,289 | 18,805 | 19,672 | 35.0% |
| 20 | 26,533 | 33,146 | 38,697 | 42.4% |
| 30 | 43,219 | 56,507 | 76,123 | 49.8% |
| 40 | 70,400 | 94,560 | 149,745 | 56.8% |
Over ten years the choice is worth 867; over forty it is worth 55,185. Time does the work, which is the same lesson as starting at 25 rather than 35.
| Yield | Total return | Reinvested value | Dividends' share of gain |
|---|---|---|---|
| 1% | 6% | 57,435 | 30.0% |
| 2% | 7% | 76,123 | 49.8% |
| 3% | 8% | 100,627 | 63.3% |
The yield table holds price growth fixed, which flatters high yields: in practice a company that pays out more usually retains less to grow, so a higher yield does not simply add to the total. Read the table as what reinvestment does to a given yield, not as a reason to chase one.
If dividends are taxed at an illustrative 15 per cent before reinvestment, 1.7 per cent is left to reinvest and the total return is 6.7 per cent. The 30-year pot is 69,973 instead of 76,123, a cost of 6,149. The same compounding that makes reinvestment powerful makes a small leak expensive, exactly as with one percentage point of fees.
For a regular saver the gap is larger in money. Putting 300 into the fund at the start of every month for 30 years, 108,000 in all, with 5 per cent a year of price growth compounded monthly at the equivalent monthly rate, gives 245,609 on price alone and 352,819 with the 2 per cent yield reinvested: 107,210 more.
Total return is price growth plus yield, and only reinvestment captures it: 76,123 against 56,507 over 30 years on the illustrative figures, with dividends behind half of the gain. If you do not need the income, use an accumulating fund or switch on automatic reinvestment, and keep dividend-paying holdings in tax-sheltered accounts where you can. The compounding and costs workbook behind the book's illustrations, with a blank calculator for your own figures, is on the free companion page for this book.
Price return counts only the change in the share price or index level. Total return also counts dividends, assumed reinvested. At an illustrative 5 per cent price growth and a 2 per cent yield, 10,000 becomes 43,219 on price return and 76,123 on total return over 30 years. Most index charts quoted in the news show price return.
An accumulating fund reinvests dividends inside the fund; a distributing fund pays them out. The growth is the same only if you reinvest every payout yourself. Taking them as cash instead turns an illustrative 76,123 into 56,507 over 30 years. Tax treatment differs by country, so check how each share class is taxed where you live.
Taxing a 2 per cent yield at an illustrative 15 per cent leaves 1.7 per cent to reinvest, so total return falls from 7.0 to 6.7 per cent. On 10,000 over 30 years the pot is 69,973 instead of 76,123: 6,149 less, or about 8 per cent of the result, which is why tax-sheltered accounts matter for dividend-heavy holdings.
This article is one calculation from Stock Market Investing for Beginners. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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