Dividend Strategy5 分で読めます

The Compounding Effect of Dividend Reinvestment

The S&P 500's dividend yield of 1-2% per year looks modest. Yet reinvest it for 30 years and up to 40% of total return can come from dividends.

Why Dividend Reinvestment Matters

If you receive dividends and spend them, there is no compounding effect. But if you reinvest dividends, your share count grows, and those additional shares generate even more dividends the next time.

For example, if you hold 100 shares of an S&P 500 ETF and the dividend is $1 per share (2% per year), you receive $100 in dividends. If you use this $100 to buy back shares, your holdings increase. The next year, dividends come from the increased share count. When this process repeats, the compounding effect of dividend reinvestment emerges.

S&P 500: Return With vs. Without Dividends

Historically, the difference between the S&P 500's price-only return and its total return including reinvested dividends is substantial.

Estimates for 1990-2020 (30 years): Price only: about 7.5% annual return With dividend reinvestment: about 10.1% annual return

When this difference compounds over 30 years, the final assets with dividend reinvestment are about 40% larger than without. To properly compare the long-term total return of a "growth stock with almost no dividend" versus a "value stock with dividends," you must account for dividend reinvestment.

The figures above are estimates from historical data and are pre-tax. The actual effect varies depending on how taxes are handled.

Dividend Taxes and Actual Reinvestment

There is a hidden cost to dividend reinvestment: taxes.

In Korea, overseas ETF dividends are withheld at a 15.4% dividend income tax. That is, if you receive a $100 dividend, you can actually reinvest only $84.60. This tax deduction weakens the compounding effect.

One way to address this is an accumulation ETF instead of a distributing ETF. An accumulation ETF automatically reinvests dividends internally, so dividend income tax is not levied immediately; it is instead handled as capital gains tax when you later sell. This defers taxes, so the compounding effect can be larger.

Dividend Stocks vs. Growth Stocks: Which Is Better?

The dividend-stocks-vs-growth-stocks debate is not simple.

Dividend stocks: stable cash flow, defensiveness in down markets, and a forced-reinvestment effect. Growth stocks: instead of dividends, reinvesting in the business, offering potential for greater price appreciation.

Over the long run, you cannot conclude that one is definitively better. Results differ by era and by interest-rate environment. What matters is comparing by "total return (price appreciation + dividend reinvestment)" rather than by whether there is a dividend.

This service offers a dividend-included/excluded option so you can directly check the difference between the two cases.

よくある質問

Q. Does an ETF reinvest dividends automatically?

A distributing ETF pays dividends to investors in cash. To reinvest, you must buy shares yourself. An accumulating (acc) ETF automatically reinvests dividends inside the ETF. In Korea, ETFs marked "TR (Total Return)" are often the accumulating type. Check the distribution policy in the ETF's product prospectus.

Q. Is dividend-stock investing always better than growth stocks?

No. A high dividend yield does not necessarily mean a high total return. Among high-dividend stocks, some have stalled business growth, offering only a high dividend with no price appreciation. When investing, you should comprehensively review not just the dividend yield but also the dividend's sustainability, the potential for price appreciation, and the total return.