The Dow Jones Industrial Average has entered a bit of a rough patch since cracking the key 40,000 level earlier this month, but the rise of the blue-chip index over time shows the value of taking companies that pay solid dividends. Looking back over the past 12 months, the 30-stock average is up 16.2% through Wednesday’s close, and the price-weighted index is dominated by the likes of UnitedHealth Group, Goldman Sachs and Microsoft. However, investors can improve performance when calculating dividends again. On a total return basis, the Dow is up 18.6% over the past year. Using those dividends to buy more shares of your favorite income payers and allowing them to grow over time can be a winning move. “In retirement accounts, especially for younger clients, it’s always going out — we reinvest all the dividends,” says Kim Abmeyer, a certified financial planner and founder of Abmeyer Wealth Management in Dallas. “If you think about expanding and see an upward trend in the market, if you continue to increase the position, the compound yields, and your return is higher,” he added. “The more time you have on your side, the better it is to produce compounds.” Reinvesting long-term Dow winners Investors can see the power of combined returns just by looking at some of the Dow names that helped lift the index to new heights. Consider Chevron, up 5.2% in 2024 through Wednesday’s close. The stock has a dividend yield of 4.2%, which just shows how much it pays out today. According to an analysis by CNBC Pro, an investor who bought $1,000 of oil stocks on May 28, 2004, held the position and just pocketed the dividend will reach $5,225.22, a return of 422.52% in the 20 years since then. If the same investor would have reinvested the dividend and bought more shares, he would have achieved a return of 643.52% over the 20 years. At that time, the first $1,000 invested will be $7,435.22. Earlier this year, Chevron announced an 8% increase in its monthly dividend to $1.63 per share. The stock is also an S&P 500 Dividend Aristocrat, meaning it has paid dividends for at least 25 years. The chart below details how an investor would fare after investing $1,000 in the six Dow components of the past 20 years and then earning dividends or using them to buy more stocks. Another household name that has rewarded shareholders willing to hang in there and put dividends back into the stock is Coca-Cola. Shares have lagged behind the overall market, especially considering how technology has led progress this year: In 2024, the soft drink giant is only up 4.7%, compared to the S&P 500’s 10.4% gain. However, if you invested $1,000 into stocks 20 years ago and reinvested the dividends, your investment would be $4,369.20. That represents a return of 336.92%. Earnings payout during this period will yield 233.32%. Your initial investment will rise to $3,333.20. Coca-Cola pays dividends every July. The company’s board approved a 5.4% dividend increase to 48.5 cents a share earlier this year – marking the 62nd dividend increase. SHOP.NS’s dividend yield is 3.1%. Key considerations for dividend reinvestment Your brokerage account should allow you to choose the option to have your dividends automatically reinvested, a move Abmeyer compares to dollar cost averaging — when you invest money over time, regardless of the asset’s price. “When the market goes down and you ask, ‘Why should I reinvest dividends?’ If you’re a long-term investor, you’re dollar-cost averaging,” he said. Abmeyer notes that even clients who take withdrawals from their portfolios have cash balances for those withdrawals while reinvesting dividends generated from stocks for long-term growth. Names on his radar now include Amgen, which yields about 3%, and Southern Copper, which has a dividend yield of 3.2%. He also likes Pfizer, highlighting the move to develop cancer drugs. Dividend income from the shares of PT. Although reinvesting in the right name can be a winning move, you need to keep a few things in mind. For starters, you’re on the hook for taxes on those dividends — whether you spend them or reinvest them — when you hold those shares in a brokerage account. You should also think about the size of the position in relation to the entire portfolio: Does reinvesting dividends over time create a skewed position in certain stocks and harm your diversification? In that case, you can choose to use the dividend to buy a different asset. Work with your financial advisor to review your time horizon and risk appetite to ensure your asset allocation reflects your long-term goals. – CNBC’s Chris Hayes contributed reporting.
(tagFor Translation)S&P 500 Index
