Your money is yours, obviously. Besides what you owe to the government, you can do whatever you want with it. That goes for dividends as well. If you’re investing in stocks that offer dividends, it can be great knowing you’re receiving funds that come in each and every quarter — sometimes every month — like a paycheque!
But there’s a trick you can do, and it can make all the difference — especially if you put it into your Tax-Free Savings Account (TFSA).
Don’t worry; it’s legal!
Yes, you can absolutely turn thousands into millions with this trick, and it’s so simple everyone should be doing it. It’s all reinvesting. If you have dividends stocks and you’re using those dividends to make car payments or pay down debt, I totally get it. But if you’re just stashing it away in your savings, the best thing you can do is reinvest that income!
Let’s say you’ve invested in Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), for example. Shares in this stock have a dividend yield of 4.7% as of writing — the highest of the Big Six banks. Shares are up 65% in the last year back to pre-pandemic prices, and up 148% in the last two decades for a compound annual growth rate (CAGR) of 4.64% as of writing.
I tell you all this to show you that not only would you be receiving strong dividends, but you’ll have share growth to match! In fact, the dividend CAGR for CIBC in the last decade is at a strong 5.3%! So, if you were to reinvest your TFSA dividends back into the stock, here’s how it could shake out.
First, let’s look at what would happen if you didn’t reinvest your cash. Let’s say you had $50,000 you wanted to invest in CIBC. That would give you 407 shares today. Now, let’s assume we see similar growth in the future of 4.64%. In 30 years, you could turn that $50,000 into $195,178.26! Definitely nothing to sneeze at.
But let’s see what happens when you reinvest those funds. Each year, you take the money made from dividends and put it back into CIBC stock. If we take those same numbers and growth, including the dividend growth of 5.3%, suddenly your funds explode. In 30 years, you would have turned that $50,000 into $903,700.22! That’s almost a million dollars without adding a penny of your own money.
Yes, it can be important to use dividends for other purposes. Paying down debt is especially important for your financial future. But if you have the ability to use those dividends towards reinvestment, the proof is there. You can become a millionaire without even adding a penny after your initial investment. You simply take the cash the company gives you and put it back towards the stock.
In the case of bank stocks, it doesn’t get much better. These companies have been around for over a century so are likely to be around in another few decades. That leaves your money in safe hands, making cash you can count on come retirement. Oh, and it’s all tax free!
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned.