Asumming you have an option to buy into two stocks that are exactly the same. The only difference is that one gives a 6% annual yield twice a year and the other gives a 6% annual yield four times a year. You might think that both are pretty much equal in value, but think again. In the spirit of compounding, the shorter the compounding interval, the more money you will receive in the end.
Assuming a base amount of $100,000 and a calculation period of 10 years. This is the amount you will get if you compound twice a year:
This is the amount you will get if you compound four times a year:
As you can see, after ten years, the quarterly compounded stock gives you $790.72 more interest. Although the difference is slight, it is something to take note of. Always choose the stock that gives you dividend on a shorter interval basis assuming everything remains equal.
Hi hayden
ReplyDeleteThats assuming all the divide ds are reinvested back immediately with the same rate. Drips would take care of that but presents a different difficulties with the odd lots. There are not many people who does that in practical so I guess it is more applicable on theory.
Hi B,
DeleteThat is true. But even if we compound into starsaver 0.8%. The quarterly compounding stock will still have a higher interest.