The effects of reinvesting dividends on growth vs yield

Caution - Math Ahead!
In a recent post, I compared the effect of dividend yield vs. dividend growth. In that article, I did not include the effects of compounding the dividend payments back into the investment because the mathematics made my brain cell hurt. I did speculate that compounding might help the higher yield more than the lower yield since the higher initial dividends would be compounding more over the lifetime of the comparison.

So this week I’ve been spending some quality time with my brain cell to learn about the math behind compounding although it’s taken quite a bit longer than I expected. This weekend I finally found the answer I was looking for with the help of some friendly and knowledgeable people on a couple of mathematics forums. So I thought I’d share what I learned.

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Plans for my Roth IRA

It’s been a while since my last post – I’ve not made any stock purchases and I’ve been busy trying to figure out the effect of compounded dividend growth when the dividends are re-invested. It seems I was correct in my previous article comparing yield vs. growth that the mathematics behind it is complicated. I’ve been learning a lot but I’m not quite there yet.

Anyway in lieu of stock research, what I did recently was to revisit my Roth IRA and make some decisions about it. Currently this year I’ve not contributed to my Roth IRA.

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Book Review: The Little Book of Behavioral Investing

There’s a huge amount of psychology in investing, with many investment decisions being driven by emotion rather than logic. This area of research is known as Behavioral Finance and it attempts to understand why people make irrational investment decisions. You may have made some emotional investment decisions in the past, but chances are you’ll quite likely deny it as you’ve convinced yourself it was entirely rationale and logical. Here’s my review of The Little Book of Behavioral Investing: How not to be your own worst enemy (Little Books, Big Profits (UK))

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Is dividend growth better than yield?

My brain cell has been occupied recently about comparing yield and growth. I mean what’s better – 1% yield with 10% growth or 2% yield with 5% growth? Does it even matter? Armed with some vague memories of math classes in my dim and distant past, and some astute web searches, I did some investigating to see if I could find out.
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Industrial sector stocks – my purchase in July

I recently sold my Delta shares which means the industrial sector in my portfolio is now underweight. Here’s a review of the remaining industrial sector stocks in my portfolio as well as some new candidates as I consider what to purchase.

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How to deal with uncertainty and reach financial independence!

An ounce of prevention is worth a pound of cure

I like including a quotation at the end of my posts, but today I included one in the title too as a added bonus. You can earn extra credit if you know who said it!  I recently wrote about having an emergency fund and while writing it, my brain cell started to think, “is there anything I can do to prevent myself from having to use my emergency fund in the first place?”. It turns out there is, it’s called managing risk and it’s done all the time in project management.

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Mastering disaster with an emergency fund – but how much is enough?

An emergency fund is money that’s put aside in case of an emergency. That was easy wasn’t it? But how big should it be and where should you even keep it? Your answer is likely to be different than mine. But I realized yesterday that I don’t really know why I’m keeping 1 year’s living expenses in my emergency fund. It’s time to re-evaluate.

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July Purchase – Consumer Defensive dividend stocks

I’ll be taking another step towards Independence on Tuesday as I look to add to my portfolio with Consumer Defensive dividend stocks. This sector has the lowest weight in my dividend stock Portfolio and the sector contains some great dividend paying companies so I’m onboard to go shopping.
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Financial Independence Day!

Financial Independence FireworksIt’s the Fourth of July today which means it’s Independence Day here in the US! That’s as good a reason to talk about Financial Independence as any I can think of!

As a Brit living in the US, I usually joke to my friends that I don’t celebrate this holiday since it represents the legal separation of the original Thirteen Colonies from Great Britain back in 1776. But of course I do celebrate it, and I enjoy living here in the States. Although I am looking forward to visiting my family in the UK later this year!

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