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Author: exilion Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27820  
Subject: Re: Quick and simple question Date: 8/27/2001 12:54 PM
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I was wondering what the "old timers" consider is best to do with dividends.
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Belgoboy,

In a phrase, just do it. Reinvest the dividends today. It is money you never really knew you had to start with and over time is the dividends that compound the most times over the term of investment that equal the large payoff. Someday when you are living at comfortably, change your option from reinvest to OCP only. Live off your dividend checks and add to your holdings at will. On my e-mail I have a tagline that is a quote attributed to Benjamin Franklin:

"Money makes money. And the money that money makes, makes more money."

This is the core, fundamental base of compound interest.

Compound interest is such a powerful tool. Given enough time, you may accumulate more and more money by doing nothing other than adding more of your own cash, letting that cash earn cash, and letting that cash earn cash. Admittedly, time is the toughest component to spare when one finally has the money to set aside for a period of time, but to borrow a line from the movie "A League of Their Own" – “Of course it's hard! It's supposed to be hard! If it weren't hard, everyone would be doing it. The HARD is what makes it GREAT.” (Thanks to jenpowell, http://boards.fool.com/Profile.asp?uid=96919342 for this quote.) You just need ample time to realize the power of compounding. As we live day to day, this concept, like the concept of an infinite universe is sometimes difficult to get your head around. We focus on our moment to moment existence, and not so much on what our entire life times entail.

I believe Chairman Buffett of Berkshire Hathaway has explained the exception to compound interest. It is the Law of Big Numbers. When you accumulate such a vast fortune, in today's terms between a few hundred billion dollars and a few trillion dollars, there ceases to be avenues where money can be deployed to earn more money. You are at a mass as such that can only increase as much as the global economy will allow it. At this point you can own all assets that will perform well enough to still gain and no more. At this point growth slows and nearly stops but pretty much entirely supports the global economy. Also, at this point, a rational person probably has no more materially to want. However, until you get to this point, I wouldn't sweat it too much. If you get here and run into the Law of Big Numbers, let us know, and we will figure out something I'm certain. There are charities that deserve support, that are always in need of financial backing.

Compound interest is akin to a second religion to me. I believe it. It has even been proven to me. It works for decades before slowing dramatically. Long after I am gone.

My point is - Compound interest only grows stronger with time and dividends, interest, and additional investments of capital. Take away dividends and your stock may grow through price appreciation and additional investments or OCPs, but you have cut off the leg of the added dividend growth. Many times you will see historical returns quoted as "increased by X%, but with dividends reinvested it increased XX+%". Dividends matter. They always have. They are a crucial component in allowing compound interest to work for you.

You have to work hard for your money.

You must let your money be on constant overtime, continually busting it's @$$, working harder for you!


exilion
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