5 Don’t underestimate the value of income

People tend to think that it is the upward move in share prices that generate by far the majority of returns in the portfolio. This significantly underestimates the value of the income that a portfolio generates if reinvested. An analysis of the US Stock market for the period from 1930 to 2012 showed that over 40% of the real return of the index came from dividends.

Two quotes make the point as regards the importance of income nicely:

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein

“Reinvest your dividends,” advises Edward Bonham-Carter, vice-chairman of fund management group Jupiter. “Lots of people in markets think it’s capital return and the expectation of p/e [price/earnings multiple] gains but over the long term it’s the reinvestment of dividends that investors make their money from.”