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Compounding Dividend Income

What is compounding dividend income and why is it important as part of an investment strategy? It is a simple principle, if your share investment pays out a dividend and you use that money to buy more shares, in the following year your dividend payment will be bigger (as you now own more shares). The magic of compounding dividend income means that your investment and the income it produces grows without ever having to invest more capital. Here is an example using McDonald’s dividend per share to illustrate compounding dividend income. Dividend income grows every year as annual dividends paid out per share are increased from 15c per share in 1996 to $3,45 per share in 2015. That is a dividend growth of 17,9% per annum over 20 years! That means your income grows at 17.9% for 20 years just by holding the shares. Imagine getting your salary to grow at the rate per annum or your rental income to grow at that rate!

McDonald’s Brand Divinded Per Share Growth

McDonald’s dividend income

If you had invested $10,000 in McDonald’s in 1996; in 2015, you would have received a dividend of $2,415, or a 24,5% return on your original investment in a single year without selling any of your shares.

McDonald’s Divinded Income Growth

McDonald’s dividends reinvested unlock compounding

But you can do even better. If you reinvested your dividends in January of every year, you would have received an income of $3,794 in 2015, and your 2015 return on your initial capital would be 37,94% without selling any of your shares. By reinvesting your dividends in January of each year, your income will be $1379,44, or a 57% higher annual income with the same $10 000 investment. That is the power of compounding dividend income.

McDonald’s Divinded Income Growth

McDonald’s returns all your capital in dividends

Another benefit of compounding dividend income, is that your $10,000 investment in 1996 will have been fully paid back to you in dividends by 2011. By that date, that total value of the dividends received by you would have been $12,075.

Comulative Divinded Income

Your capital becomes your annual dividend

If you had begun the same process in 1991, you would have received an annual dividend of $10,160.43 in 2012. That is your entire invested capital back as a dividend in a single year, with your annual dividend growing to $13,553.26 in 2015. That is an annual income that is greater than your initial investment. Have you considered how long it would take until that becomes more than your salary? Here are a few things to consider before making an investment decision:

Key investment questions

  1. Do your investments pay you an increasing income in the form of a dividend?
  2. Are you able to reinvest your dividends to unlock the power of compounding?
  3. Does your investment program have the potential to turn your current capital into an annual dividend?

At AXIAM, our focus is to provide our clients with a growing annual income through dividends. Our ultimate objective is to turn your current capital into an annual dividend. If you are interested in learning more, sign up to our newsletter or contact our fund management team to invest.

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