If you want to become wealthy then one of the main things that you need to do is re-invest your dividends.
One of the biggest parts of investment returns is the dividends. Indeed, historically, dividends have contributed up to half of long-term total returns because of the power of compounding.
As genius Albert Einstein once supposedly said that compound interest is the most powerful force in the universe, "He who understands it, earns it; he who doesn't, pays it."
If you're a retiree then it's understandable that you need to utilise the dividends to pay for your lifestyle, but if you can re-invest some or all of the dividends then you will build your wealth a lot faster. It could be the difference between your wealth compounding at 10% a year or 7% a year if the dividend is 3% a year.
If you start with $10,000 then in 20 years it turns into $40,000 at 7% per year. If it compounds at 10% a year it turns into just over $73,000. Quite the difference, isn't it? Close to double the total at the end even though the share market returned the same amount.
You don't necessarily have to use each shares' dividend re-investment plan, you could receive the dividend as cash and add it to your next share purchase.
Not only can you re-invest your own dividends, but if you can find businesses that are able to re-invest their retained profit at a good rate of return they can compound wealth strongly for you as well. That's why shares like CSL Limited (ASX: CSL) and REA Group Limited (ASX: REA) have turned into such large, successful businesses, making their long-term shareholders a lot of money.
