The Motley Fool

The easy way to financial independence

Financial independence might seem like an impossible dream for many, but if you put in place a set saving-and-spending plan, and stick to it, you will be surprised how quickly financial independence can become a realistic goal.

A strict budget and savings plan is the first stage of building your wealth. The next step is investing to make your money work harder for you. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The great thing about investing is that your money can work for you even when you’re asleep. Your earnings ability will no longer be constrained by your working hours. Instead, you’ll be able to benefit from the profits of other companies and other workers.

The power of dividends 

Dividends and dividend stocks play a crucial role here. Many studies have shown that dividends provide the bulk of investment returns for investors over the long term and by reinvesting your dividends you can achieve investment returns that are far greater than the market average.

For example, if you have a £1,000 investment in a company that yields 5% per year, you would receive £50 per annum in dividends, much more than the current level of interest available on most savings accounts. If the dividend payout remained unchanged for 10 years, and for argument’s sake, the share price also remained unchanged, without reinvestment you would receive a total of £500 over the life of the investment, a return of 50%. 

However, if you were to reinvest these funds at the end of the period, your investment would have grown to £1,551, an extra profit of £51.

Turbocharged returns

This basic example illustrates just how powerful the strength of dividend reinvestment can be. To add to the example, let’s say the value of the share in question rose by 5% every year. This capital growth combined with dividend reinvestment makes a super-potent combination. According to my figures, in this example, if the dividend is paid only once a year, within a decade the combination of capital gains and income will have turned the initial £1,000 investment into £2,236. Most companies don’t pay out the same dividend every year. They try to increase the per-share dividend by at least the rate of inflation. 

So, let’s assume that the company in our example increases its dividend payout by 5% per annum. In this scenario, assuming dividends are reinvested, a steady share price growth rate of 5% per annum and dividend growth, £1,000 will become £2,407 by the end of the decade sample period, almost £1,000 more than the example with no dividend reinvestment.

These are only simple examples but they clearly illustrate how important dividends are and how easy it is to build wealth by concentrating on the power of dividends and dividend reinvestment. If you’re looking to achieve financial independence, this is one shortcut that you definitely shouldn’t avoid. You should try to take as much advantage of the power of dividends as possible.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.