03-26-2013, 06:30 PM
So here is another of several reasons that I love stocks that pay a healthy dividend. In the first half of 2012, I bought 400 shares of Annaly Capital Management (NLY), at an average price per share (including commissions) of $16.62. So in total, I spent $6648 for the shares. In recent months, NLY has traded below $14, but it has rebounded some and today is trading for $16.10 per share. Still, I’m a loser, right? At least on paper? My 400 shares are only worth about $6440 today. 
But wait, what’s this? It turns out that I don’t own 400 shares of NLY. My brokerage account shows me holding 438 shares. That’s right; I’ve been reinvesting my NLY dividends back into more shares of the stock, and so every quarter I’m buying more shares – and at the recently lower prices too! Even with the price drop, when you factor in the dividend reinvestment, my $6648 investment is now worth $7051 (that’s today’s $16.10 times my 438 shares). Not too shabby. That’s approximately a 6 percent return for about a year.
Of course, my $6648 may have gained even more if I had invested it in some other way. My point is not that NLY is the best (or even a great) investment – it has plenty of risks. My point is about the power of dividends. The dividends I’ve received from NLY have more than offset the capital losses that I have on paper for the original 400 shares that I bought. Dividends are truly a bird in the hand – they lower your cost basis and provide a nice cushion whether the share price is rising or falling. With a stock that does not pay dividends, you are entirely at the mercy of the share price.
But wait, what’s this? It turns out that I don’t own 400 shares of NLY. My brokerage account shows me holding 438 shares. That’s right; I’ve been reinvesting my NLY dividends back into more shares of the stock, and so every quarter I’m buying more shares – and at the recently lower prices too! Even with the price drop, when you factor in the dividend reinvestment, my $6648 investment is now worth $7051 (that’s today’s $16.10 times my 438 shares). Not too shabby. That’s approximately a 6 percent return for about a year.
Of course, my $6648 may have gained even more if I had invested it in some other way. My point is not that NLY is the best (or even a great) investment – it has plenty of risks. My point is about the power of dividends. The dividends I’ve received from NLY have more than offset the capital losses that I have on paper for the original 400 shares that I bought. Dividends are truly a bird in the hand – they lower your cost basis and provide a nice cushion whether the share price is rising or falling. With a stock that does not pay dividends, you are entirely at the mercy of the share price.
