Invesco Global Clean Energy ETF, A Five-Year Analysis: How Important Is Re-Investing Dividends?

Compounding Returns

In a world obsessed with price movements of stocks, it's easy to lose sight of what those prices represent -- the value of holding a company's future earnings potential. One of the key ways that company earnings find their way into an investor's pocket is through dividends, which are cash or stock payments that represent a portion of a company's retained earnings. Retained earnings is found under the shareholder's equity portion of the balance sheet and represents the amount of earnings a company has left over after paying dividends to its shareholders.

Retained earnings is calculated as:

RE = BP + Net Income - Dividends Where BP = Retained Earnings at the beginning of the period.

Before further discussion of why dividends can be impactful in the long-term, here's a plot showing how much of a difference reinvested dividends would make in one's five year holdings of ARCA:PBD compared to holding the dividends as cash and regular price appreciation.

The following plot shows three values over a five-year period: 1) The value of a $100 investment in PBD, with only price appreciation. 2) The value of a $100 investment in PBD, without re-investment. 3) The value of a $100 investment in PBD if dividends were immediately reinvested. 4) The value of a $100 investment in NASDAQ:SPY if dividends were immediately reinvested.

Dividend Mechanics

Dividends will be announced with an ex-date. This is the date by which one must hold a share in order to receive the dividend. Right when trading closes on that day, the market price of each share is expected to drop by the size of the dividend, because anyone now purchasing the stock will not receive the dividend.

However, by the time the market opens the next day, the stock price could rebound up beyond its previous close, or continue to lag after the dividend rights have been rewarded. This uncertainty is simply due to broader market forces that exist on any day of trading.

PBD's Reinvested Dividend Value Compared to That Of Index ETFs

The plot above shows how much reinvested dividends of PBD's have returned compared to those for the popular ETFs SPY and NASDAQ:QQQ (which track the components of the S&P 500 and NASDAQ 100, respectively, and pay out dividends for their underlying securities). Note that the bars could not be below zero, because a reinvested dividend represents a fraction of a share of a company, and company shares cannot go below zero. Note, too, that the bar for PBD represents the final difference between the red and blue lines on the first graph above.

Finally -- what's the point of all this? The key insight to take from this article is to note how much value simply looking at the price chart of PBD's common stock misses if one's considering holding the stock for a long period of time. Dividends surely can matter.

You can check out Benzinga's dividend data here or in an enhanced view on Benzinga Pro