How To Make Market Volatility Work For You

Man stressed about the volatile market

The recent stock market volatility reminds me again of the power of reinvesting the income from your dividend investment strategy. Once you understand the compounding power of dividend reinvestment, you realize that it’s very good for your long-term wealth when the stock market goes through a period of decline.

It’s something my Dividend Hunter members have profited from a lot over the years. So today, let’s look at how a dividend reinvestment strategy works to increase your wealth, especially when markets turn volatile.

A fundamental concept is that the share price of a quality dividend-paying investment will eventually recover from any downturn. There are exceptions, but very few income stocks don’t recover from a market decline.

Here are the factors in play with a dividend reinvestment plan:

  • When reinvesting dividends, the number of shares you own and the size of the dividend payment go up with every dividend earned.
  • If the share price is down, the reinvested dividend buys you more shares, resulting in a lower average cost per share and faster growth of your dividend income stream.
  • When the share price is high, fewer shares are purchased.
  • The cycle of buying more shares when the price is down and fewer shares when the price is high leads to a growing value of the stock position, even if the longer-term stock price trend is relatively flat.
  • The dividend income stream grows with each dividend payment, providing compound growth to the income earned and the number of shares owned.

Let me illustrate possible results with a real-world example. I added Main Street Capital (MAIN) to my recommendations list in July 2014. MAIN pays monthly dividends and typically yields around 6%.

From July 1, 2014, until Dec. 2, 2021, MAIN posted a 94.77% total return, which corresponds to a compound annual growth rate of 9.39%. If you invested $10,000 in MAIN at the start, the shares plus cash from dividends would now total $19,471.

If you had your MAIN shares on automatic dividend reinvestment over the same period, the returns earned jump substantially. The total return would be 136.43%, giving an annual compound return of 12.29%. The $10,000 initial investment would now be worth $23,646.

In this case, reinvesting dividends increased the return on the $10,000 by 42% – a pretty amazing difference.

During these seven-plus years, the MAIN share price dropped by more than 10% seven times, including a 66% drop during the 2020 pandemic-triggered crash. Those share price declines were when the final great gains were made by buying shares when they were “on sale.”

Those who don’t understand the power of dividend reinvestment may have chickened out and sold at a loss then. But us dividend investors, we knew better.

Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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