Imagine planting a tree that not only bears fruit but also sows its own seeds to grow more trees. That’s what dividend reinvesting does for your portfolio. What if you could turn a $100,000 investment in 2000 into more than $600,000 by 2024—without adding a single extra dollar? Would you do it? This is the power of dividend reinvesting at work.
When companies pay dividends, you have two choices: pocket the cash or reinvest it to buy more shares. While cashing out may be tempting, reinvesting can significantly accelerate your wealth-building. Think of it as a snowball rolling downhill—gaining size and momentum over time. By reinvesting, you acquire more shares, which generate even more dividends, allowing you to buy additional shares, and the cycle continues. Many companies and brokers now offer Dividend Reinvestment Plans (DRIPs), making this process seamless and automatic for investors looking to compound their returns.
DRIPs can also help eliminate the emotional aspect of investing. Instead of trying to time the market or deciding how to use your dividends, you can automatically reinvest them, fostering a disciplined and consistent approach to wealth-building. Over time, this strategy can lead to substantial gains, particularly in markets with reliable dividend-paying companies, such as those in Asia.
Dividend reinvesting in the U.S., Singapore, and Malaysia
Let’s create a scenario where we invest 100,000 in local currency in each market index and determine how much the investment would be worth today, both with and without dividend reinvestment. For the U.S. and Singapore markets, we will start in 2000, while for the Malaysian market, due to data limitations, we will start in 2010.
S&P 500 (United States)
For the U.S. market, we use the S&P 500, a benchmark index representing 500 of the largest U.S. companies, which has historically delivered strong returns.
If we had invested USD 100,000 at the beginning of 2000, it would have grown to USD 394,580 without reinvesting dividends. However, withdividend reinvestment, the investment would have reached USD 634,020—1.6 times more than relying on capital gains alone.
Straits Times Index (Singapore)
In Singapore, the Straits Times Index (STI) comprises many well-established companies known for their stable dividend payments. In a market like Singapore, which tends to experience moderate growth compared to the U.S., dividends play a crucial role in total returns.
If we had invested SGD 100,000, it would have grown to SGD 138,040 without reinvesting dividends. However, with dividend reinvestment, the investment would have reached approximately SGD 331,830—about 2.4 times more.
Singapore’s market presents an even more compelling case, as the gap between the two approaches is wider compared to the S&P 500. This is due to the STI’s higher dividend yield of around 4%, while the S&P 500’s yield stood at only approximately 1%. As a result, reinvesting dividends can significantly enhance overall returns, making it a valuable strategy for investors seeking steady growth in a stable market.
FBMKLCI (Malaysia)
Malaysia’s FTSE Bursa Malaysia KLCI Index (FBMKLCI) represents the performance of the 30 largest companies on Bursa Malaysia. Dividend reinvestment is particularly important in a developing market like Malaysia, where capital appreciation tends to be slower compared to more mature markets.
If we had invested MYR 100,000, it would have grown to MYR 128,970 without reinvesting dividends. However, with dividend reinvestment, the investment would have reached MYR 214,100—about 1.7 times more.
Malaysia’s market highlights how dividend reinvestment can help offset lower capital appreciation. Even with a later starting point, reinvesting dividends significantly boosts returns. Dividends make up a substantial portion of total returns for Malaysian investors, and by reinvesting them, investors can maximize gains and counterbalance slower capital growth—an essential strategy for long-term wealth building. With time, this divergence will only widen, further demonstrating the power of reinvesting dividends.
The tax factor
Now, let’s focus on tax treatment, as it varies by country and can significantly impact your returns. Below is a general overview of the tax treatment for residents in each country:
- United States: dividends are classified into two categories: qualified dividends and ordinary dividends, each with different tax treatments. Qualified dividends are taxed at favorable capital gains rates of 0%, 15%, or 20%, depending on income levels, while ordinary dividends are taxed at regular income tax rates, ranging from 10% to 37%. For non-resident investors, U.S. dividends are subject to a withholding tax of up to 30%, depending on the applicable tax treaty.
- Singapore: Dividends paid by Singapore-resident companies are generally not subject to tax for shareholders under the one-tier corporate tax system, making reinvestment highly efficient.
- Malaysia: Under the single-tier system, dividends are not subject to further tax since corporate income has already been taxed. However, Malaysians should note that starting in 2025, dividend income exceeding RM100,000 will be taxed at 2%.
Tax efficiency is crucial for maximizing returns. The above is just a general overview, and tax treatment may differ for foreign investors. Therefore, investors should consult a tax advisor to gain a deeper understanding and optimize their strategy.
Benefits and challenges
The benefits of dividend reinvesting are clear—it enables the power of compounding with minimal effort and can often be automated. By reinvesting dividends, you continuously acquire more shares, which in turn generate more dividends, creating a cycle of exponential growth over time. Additionally, dividend reinvesting incorporates dollar-cost averaging, as you consistently buy shares regardless of market conditions. This approach helps mitigate the risk of market timing, which is virtually impossible to execute successfully.
However, dividend reinvesting comes with its own challenges. Taxes and transaction fees can eat into overall returns, particularly when investing in foreign markets. Currency risks also become a factor when dealing with international stocks, potentially impacting gains. Patience is another crucial element, as dividend reinvesting is a long-term strategy that requires investors to endure market downturns and periods of low yield without losing confidence or abandoning the approach.
The fifth perspective
Dividend reinvesting is a simple yet powerful strategy for building long-term wealth. By consistently reinvesting dividends, investors can harness the power of compounding while developing the discipline needed for successful investing in the stock market. Whether you’re investing in a mature market like the U.S., a stable market like Singapore, or a developing market like Malaysia, dividend reinvesting can have a significant impact on your portfolio’s performance. As the saying goes, “The best time to plant a tree was 20 years ago. The second-best time is now.”
Final reminder! Enrollment for Dividend Machines closes Sunday, 2 March 2025, 11:59 PM. If you’re looking to learn how to invest in dividend stocks and REITs while building multiple streams of passive income, we highly recommend checking out Dividend Machines before applications close! Once the deadline passes, Dividend Machines won’t reopen until 2026. So, if you miss this round, you’ll have to wait a year (or more) before we accept new applications again.
