Instead of pocketing your dividend payments as cash, you automatically use them to buy more shares of the same investment. Those new shares then earn dividends too, which buy even more shares, and so on. Over time, this snowball effect can make a big difference. More in Reinvesting Dividends.
- $10,000Invested at 4%
- +$400Paid this year
- $10,400Put back to work
- +$416Paid next year
Walk through the numbers
A $10,000 investment paying 4% sends you $400 in a year. Put that $400 back to work and next year you earn on $10,400. Repeat for 20 years and the payouts themselves buy a large share of your holdings.
Reinvested payouts compound. It turns a fixed stream of income into one that keeps growing.
Related terms
For education only and not personalized investment advice. Examples are hypothetical illustrations, not a prediction or a promise of results. All investing involves risk, including the possible loss of principal.