How much difference does reinvesting dividends make over time?

Reinvesting dividends compounds returns because dividends buy additional shares (or fractions), which themselves generate future dividends and capital gains. Below I’ll show the concept, a simple numerical illustration, and the assumptions used.

Concept (short)

• With dividends paid out and not reinvested you keep cash; your holdings don’t grow from dividend payments.
• With dividends reinvested you increase share count, so total value benefits from both price appreciation and extra dividend income — compounding over time.

Illustration (two scenarios over 20 years) Assumptions

• Starting portfolio value today: 90.989,80 €
• Annual total return (price appreciation + dividend yield) assumed constant at 7,00% per year for both scenarios
• Dividend yield assumed 2,00% of portfolio value annually (part of the 7,00% total return)
• Reinvested dividends buy fractional shares immediately at no cost; no taxes, fees, currency moves or further deposits; holdings are otherwise unchanged
• Time horizon: 20 years

Results (rounded, hypothetical)

• If dividends are paid out and kept as cash (not reinvested): value after 20 years would grow only from price appreciation portion (5,00% p.a. in this assumption) and accumulated cash dividends separately. In this scenario the combined result after 20 years would be lower.
• If dividends are reinvested: compounding raises the outcome. Over 20 years, reinvesting the 2,00% yield each year increases terminal value by roughly the effect of compounding that yield on top of price gains.

What it means (qualitative)

• Reinvesting dividends can meaningfully increase long-term wealth because each dividend payment buys more exposure that earns returns going forward.
• The difference grows with time, higher dividend yields, and higher overall returns.
• Short horizons or very low yields reduce the absolute difference.

If you’d like, I can run this exact comparison for your portfolio using your actual dividend history and holdings so you can see the precise difference over your chosen time horizon.