I often meet investors who do not understand the reasoning behind re-investing dividends, and I can see their point. I would rather have cash in the bank than be exposed in a stock. On the other hand, it is important to realize that re-invested dividends are actually one of the best methods to grow wealth with as little input as possible. A very good example of the benefits of dividend reinvestment can be seen in the data from market crashes over the past 100 years – most importantly in 1929.  In 1929 the S&P 500 reached an all-time high of 333.8--three years later it was down at 133. It took the market until 1956 to reach that high again. However, if dividends were reinvested throughout that whole time frame, an investor would have seen a return of nearly 100% over the same time period! The same can be seen in the market from 2007 to 2012. The S&P 500 declined 22% over this period, but with dividends re-invested this decline was only 11% So how does this look on an individual stock basis over a shorter time period?

Individual Stocks

Wal-Mart Stores, Inc. (NYSE:WMT)

Year	Open	Close	Dividends	Total Return
1	$60.00	$67.61	$1.20	14.68%
5	$48.00	$67.61	$5.62	52.56%
10	$49.00	$67.61	$8.00	54.31%

Wal-Mart is no Google Inc (NASDAQ:GOOG) or Apple Inc. (NASDAQ:AAPL); in fact, the share price growth stinks.  The 5-year period between year 10 (2002) and year 5 (2007) shows a total growth for the share price of -$1 or down -2%. However, over a longer 10-yr period, including re-invested dividends the stock returned 54.3%. Although this is less than the S&P 500 return over the same period, Wal-Mart does have a Beta of 0.3, offering investors some security--effectively if the market suddenly plummeted 50%, Wal-Mart would only suffer around a 15% drop. In reality investors are receiving less share price growth for more share price stability. Exxon Mobil Corporation (NYSE:XOM)

Year	Open	Close	Dividends	Total Return
1	$85.30	$85.10	$2.18	2.32%
5	$95.00	$85.10	$9.00	-0.95%
10	$34.64	$85.10	$14.58	187.76%

On the other hand we have Exxon. Once again Exxon’s performance over the past 5-yr period is really, really bad: the stock has fallen just under 10%. Furthermore, over the past year the shares have hardly moved. This is where the dividend saves the day. Exxon’s strong and reliable dividend has improved shareholder returns in both cases, giving investors a total return of 2.3% over a 1-year period and effectively ruling out the fall in the share price over the past 5 years.