S&P 500 Total Return Index
Over time, stocks go up. Investments make money. People are happy.
And, when you look at a picture of the S&P 500, it’s easy to think about all the money that could’ve been made by investing a long time ago.
But, it turns out that stock market charts like that are misleading. They don’t accurately portray the gains that can be made over time. In fact, the gains are even greater than a standard chart of the S&P 500 would imply:
The dark blue line captures the S&P 500 total return index. The lighter line is the regular S&P 500 index. One trend is clearly bigger than the other.
The difference is driven by dividends. For a lot of companies, every quarter they give some money to shareholders. If those payments are reinvested into the stock market, then future returns will be greater as the investment compounds.
It’s clear then that dividend reinvestment is immensely important. Over the time period in the chart, it nearly doubles the return. That could be the difference between retiring with a million dollars or two million. (I mean look, I'd happily take either amount but if I had to choose I would choose the money pile that is twice as big.)
So, remember, when it comes to dividends, reinvest! Future you will appreciate the extra gains.