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 blue-chip index’s rise over time shows the value of picking companies that pay solid dividends. Looking at 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 boost their performance when accounting for reinvesting dividends. 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 payer and allowing them to compound over time can be a winning move. “In retirement accounts, especially for younger clients, it’s always been right out the gate – we reinvest all dividends,” said Kim Abmeyer, certified financial planner and founder of Abmeyer Wealth Management in Dallas. “If you think about zooming out and seeing the upward trend in the market, if you keep adding to these positions, those returns compound, and your return is significantly higher,” she added. “The more time on your side, the better for compound returns.” Reinvesting the Dow’s long-term winners Investors can see the power of compounding returns just by looking at a handful of Dow names that helped lift the index to its fresh highs. Consider Chevron , up a modest 5.2% in 2024 through Wednesday’s close. The stock has a dividend yield of 4.2%, which is just a snapshot of how much it pays currently. According to an analysis by CNBC Pro, an investor who bought $1,000 of the oil stock on May 28, 2004, held the position and merely pocketed the dividend would reach $5,225.22, a return of 422.52% in the 20 years since then. If that same investor were to reinvest the dividend and purchase more shares, they would have seen a return of 643.52% over those 20 years. In that time, the $1,000 initially invested would have grown to $7,435.22. Earlier this year, Chevron announced an 8% increase to its quarterly dividend to $1.63 per share. The stock is also an S & P 500 Dividend Aristocrat, meaning it has grown its dividend for at least 25 years. The chart below details how an investor would have fared after investing $1,000 in six Dow components 20 years ago and then either pocketing the dividend or using it to buy more shares. Another household name that has rewarded shareholders willing to hang in there and plug the dividend back into the stock is Coca-Cola . Shares are lagging the overall market, especially considering how tech has driven this year’s advance: In 2024, the soft-drinks giant is up only 4.7%, compared with the S & P 500′ s 10.4% gain. However, if you invested $1,000 into the stock 20 years ago and reinvested the dividends, your investment would have grown to $4,369.20. That reflects a return of 336.92%. Pocketing the income payment over that period instead would’ve resulted in a return of 233.32%. Your initial investment would have climbed to $3,333.20. Coca-Cola is about to make another quarterly dividend payment in July . The company’s board approved a 5.4% dividend hike to 48.5 cents a share earlier this year – marking its 62nd year of dividend increases. The stock has a dividend yield of 3.1%. Key considerations for reinvesting dividends Your brokerage account should allow you to toggle your preference to have your dividends automatically reinvested, a move that Abmeyer compares to dollar-cost averaging – when you invest a set amount of money over time, regardless of the asset’s price. “When the market turns down and you’re asking, ‘Why am I reinvesting dividends?’ If you’re a long-term investor, you’re dollar-cost averaging,” she said. Abmeyer noted that even clients who are taking withdrawals from their portfolios are holding a cash balance for those drawdowns while reinvesting dividends generated from the stocks for longer-term growth. Names on her radar these days include Amgen , which is yielding about 3%, and Southern Copper , which has a dividend yield of 3.2%. She also likes Pfizer , highlighting its move toward developing cancer drugs . The stock pays a dividend yield of 6%. Even as reinvesting in the right names could be a winning move, you should keep a couple of things in mind. For starters, you are on the hook for taxes on those dividends – whether you spend them or reinvest them – when you’re holding these stocks in brokerage accounts. You should also think about the size of these positions in relation to your entire portfolio: Would reinvesting the dividends over time create a lopsided position in a given stock and hurt your diversification? In that case, you can opt to use those dividends to buy a different asset. Work with your financial advisor to revisit your time horizon and risk appetite to ensure that your asset allocation reflects your long-term goals. — CNBC’s Chris Hayes contributed reporting.
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