Why dividend stocks are ‘magic’ for younger investors
Dividend-paying stocks are popular among retirees, and for good reason: The cash that companies distribute to their shareholders is a true form of passive income.
A retiree with a $1 million stock portfolio paying an average dividend yield of 3% can expect $30,000 a year just from holding the stock. But Jim Cramer, host of CNBC’s “Mad Money” and author of “” says dividend-paying stocks have a lot to offer young investors, too.How to Make Money in Any Market?“
“I love dividends,” Cramer tells CNBC Make It. “And here’s why I love dividends: If you reinvest them and keep them in your fund, you’ll end up with more stocks than you ever thought possible. [you’d have]”
In other words, if you take your cash distributions and use them to buy more shares, you can create wealth much faster.
How dividends help you build wealth
A quick reminder of how dividends work: Profitable companies have choices about what to do with their excess cash, and many financially mature firms issue cash distributions to shareholders as a sort of “thank you” for their loyalty.
You can calculate a company’s dividend yield (which reflects a firm’s payout generosity) by dividing the amount of cash you receive per year, usually divided by quarterly payments, by its stock price. A stock worth $100 per share that pays a $1 annual dividend has a yield of 1%.
The S&P 500 currently yields 1.17%, which may seem like small potatoes compared to the index’s extraordinary returns in recent years. “Most of the time, people don’t think dividends are very important,” Cramer writes in his book. “They look small, a few points at best.”
But over the long term, reinvested dividends can have a huge impact on investment returns due to compound interest, Cramer says.
“The biggest part of investing is how much more you make if you compound,” he says. “You know, about half [return of the] S&P since I’ve been in this business [dividends] merge?
Let’s say you bought $100 worth of shares, and one year later they were worth $110. You received a 10% “price” return based on the movement in the value of your shares. What if the stock also had a 2% dividend yield? If you use that dividend to buy more shares, you’ll now own $112 worth of stock, yielding a 12% “total” return.
Do this every year over a career as long as Cramer’s — he writes that he began “serious investing” in 1982 — and it’s easy to see how things could turn out.
The further back you go, the greater the dividend impact. According to the mutual fund and ETF provider, a $10,000 investment in the S&P 500 from the beginning of 1960 through 2024 would have earned you roughly $982,000 based on price appreciation alone. Hartford Funds. Over the same period, investment with reinvested dividends would increase to $6.42 million, with dividends accounting for 85% of the index’s total return.
It’s no surprise, then, that Cramer describes dividends as “magic”; as long as young investors constantly use them to support their investments.
“You can’t withdraw your dividends,” he says. “If you’re doing my schedule [and] I can’t help you if you withdraw dividends.”
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