Reinvestment

Jan 09 2023 | 4 min

Introduction

Some investments provide a steady flow of income, such as stock dividends, bond coupon payments or property rentals. This article discusses how you can unlock the power of compounding (covered in more detail in a separate article) by reinvesting the income inflows from your investments.

Why reinvesting is key?

The occasional losses that arise from active trading in stocks may wipe out years of returns overnight. The best returns accrue to those who invest with a long-term perspective.

In our separate article on compounding, we show how investing over a longer period enhances the growth of your portfolio. Reinvesting your income can further boost this growth dramatically.

For example, assume that stock A pays an annual dividend of 3% of the share price and appreciates 5% annually. If you invest $1000 in stock A for 20 years, your portfolio would grow to $2,653 in value and you would have collected $992 in dividends. This is equivalent to a total return of 264.5% or 6.7% per annum.

If you reinvested the 3% dividends in more shares of stock A, your portfolio would grow to $4,595, equivalent to a total return of 359.5% or 7.9% per annum over 20 years. A 1.2% increase in annual returns may not appear much, but the growth in the final value of the portfolio would increase from 27% to 73% by reinvesting the dividends.

 The chart below shows the effect of reinvesting 50% and 100% of the dividends, respectively, on the value of the portfolio over 20 years.

2029

Issues to bear in mind

Investment decisions must consider the power of reinvestment within the context of your aims and wider portfolio. Income-generating assets may not be the best choice for all investors.

Also, the income from some assets may not be sustainable. For example, a company that does not generate profit may borrow money to maintain dividend payments. In this case, the dividend income to the investor will be offset by the loss of value over time. Reinvesting in such a company create no value.

Reinvestment is a tool, not a goal. The starting point is a clearly documented investment strategy that sets sensible parameters for various exposures to determine your needs for short-term income and long-term capital appreciation. Working with an advisor will help you create an intelligent approach to income-generating securities while mitigating risks. Please consult your advisor or contact The Family Office for any questions or assistance.

 

Disclaimer

This presentation is provided to you by The Family Office Co. BSC(c) (“The Family Office”) for informational purposes only, and contains proprietary information that may not be reproduced, distributed to, or used by, any third parties without The Family Office’s prior written consent.

All information, figures, calculations, graphs and other numerical representations appearing in this presentation have not been audited and may be subject to change over time. Furthermore, certain valuations (including valuations of investments) appearing in this presentation are subject to change as they may be based on either estimates or historical figures that do not reflect the latest valuation. Although all information and opinions expressed in this presentation were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to their accuracy or completeness. The information contained herein is not a substitute for a thorough due diligence investigation. Past performance is not indicative of and does not guarantee future performance. Exit timelines, prices and related projections are estimates only, and exits could happen sooner or later than expected, or at a higher or lower valuation than expected, and are conditional, among other things, on certain assumptions and future performance relating to the financial and operational health of each business and macroeconomic conditions.

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This presentation represents a summary of certain information, the full terms of which are contained in a Private Placement Memorandum that should be reviewed for a more complete understanding of the investments and their risks. In addition, this presentation does not constitute an offer to sell, or a solicitation to buy, any instrument or other financial product, nor does it amount to a commitment by The Family Office to make such an offer at present or an indication of The Family Office’s willingness to make such an offer in the future.

The Family Office is a Category 1 Investment Firm regulated by the Central Bank of Bahrain C.R.No.53871 dated 21/6/2004. Paid Up Capital: US$ 10,000,000. The Family Office only offers products and services to ‘accredited investors’ as defined by the Central Bank of Bahrain.

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