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The Rewards of Reinvesting Dividends

Learn how reinvesting dividends can contribute to higher account values and share balances.

Why Dividends Matter

A company’s dividends, based on the value of its stock, can be a good indicator of the company’s strength and prospects. Paying dividends shows it’s doing well enough to distribute some of its income to investors. When a mutual fund’s holdings pay dividends, the fund passes them on to investors. Investors usually have a pair of choices: They can take a fund’s dividends in cash, or they can reinvest the dividends and use them to buy more shares. Dividends are reinvested automatically in a retirement plan.

While past results do not guarantee results in future periods, it’s worth noting that since 1929, dividends have accounted for nearly half of the S&P 500’s total return.

The Power of Reinvested Dividends

When reinvested, the power of dividends is multiplied. A hypothetical investment of $1,000 in the S&P 500 on December 31, 1993, would be worth $3,070 20 years later if all dividends had been taken in cash. However, if the dividends had been reinvested, that same $1,000 would have grown to $5,830.

The Rewards of Reinvestment Over 20 Years

Reinvested dividends add value to total returns over time because they can be compounded and unrealized appreciation cannot. Source: Standard & Poor’s Corporation.

The gap can be dramatic when share prices are growing slowly or not at all. Dividends could be the only positive return an investor receives in a flat market. In a recent 10-year period (August 7, 2001 – August 7, 2011), for instance, the S&P fell 0.04%. Investors who started with a hypothetical investment of $10,000 in the S&P and took dividends in cash would have ended up with an account value of $9,958. However, those who reinvested dividends during that period would have seen a positive return of 1.90%, and their $10,000 would have grown to $12,076.

Reinvested dividends can help add to total return because they allow you to purchase additional shares, which could appreciate and provide additional dividend income. They can increase returns when the market’s going up, and could add a bit of a cushion during downturns.

When Are Dividends Paid by American Funds?

Our mutual funds pay dividends on a specific schedule depending on the fund’s objective:

  • Growth funds generally pay dividends annually.
  • Growth-and-income funds generally pay dividends quarterly.
  • Equity-income and balanced funds generally pay dividends quarterly.
  • Bond funds and tax-exempt bond funds generally pay dividends monthly.
  • Money market funds generally accrue dividends daily and pay them monthly.

Additionally, a fund may pay a special dividend when the investment income generated by the fund exceeds the income the fund has paid in the form of dividends throughout the year. Special dividends are distributed with the last dividend payment at the end of the calendar year.

Why Do Dividends Vary by Share Class?

Since expenses and dividends are paid from a fund’s income, the expense difference associated across share classes will affect the amount of the dividend distribution. Classes with higher expenses will have lower dividends.

Are You Reinvesting?

Go to Your Portfolio to see if you’re reinvesting dividends or to start doing so.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.  

You could lose money by investing in the American Funds Money Market Fund. Although the fund seeks to preserve the value of your investment at $1.00 share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.  

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses , which can be obtained from a financial professional and should be read carefully before investing.   

Standard & Poor's 500 Composite Index is a market capitalization-weighted index based on the average weighted results of 500 widely held common stocks.