The process of reinvesting dividends paid by an investment, such as shares of an exchange-traded fund focused on high-dividend stocks, automatically back into purchasing additional shares of that same investment is termed a dividend reinvestment program. For instance, if an individual holds shares in a fund known for its dividend yield and participates in such a program, the cash dividends received are not distributed to the investor’s brokerage account. Instead, they are used to buy more shares of the fund. The number of shares acquired is determined by the dividend amount and the share price at the time of reinvestment.
Engaging in dividend reinvestment can lead to accelerated portfolio growth through compounding. The additional shares acquired through reinvested dividends generate further dividends in subsequent periods, creating a snowball effect. This strategy can be particularly advantageous for long-term investors seeking to build wealth over time, as it leverages the power of compounding without requiring active management or additional capital contributions from the investor. Historically, dividend reinvestment programs have proven effective in enhancing returns, especially in securities that consistently pay dividends.