Dividends Matter

I thought about the power of dividends when I worked on my mother-in-law’s taxes.  She has been selling off an investment to help pay for her care and as the one who helps her with her taxes, I had to find her basis (what she originally paid for it) to report it on her tax return.  She’d owned this mutual fund as long as I’ve known her and that means she has been taking a dividend from it for almost 20 years.  When I dug into it, what I found was that she had a loss – her initial investment not only hadn’t grown but was less than she put in.  What a disappointment!

That got me thinking.  I wonder how much she benefited from that investment over the years.  Was it a good one or was it a 25 year waste of time?  I decided to do some research and figure out how much income she pulled from that over the years.

Here is what I found out:

Initial investment: $20,000

Estimated investment date: Jan. 2, 1985 — sold off in 2010 for $19,150

She put in $20,000 and immediately started taking about $100 per month in income.  The first check came in her mail box in February of 1985 which she took to the bank and cashed.  Over the years, technology changed and the dividend was directly deposited into her account so that she eventually collected over $33,750 in dividends.  When you add that to her $19,150, the value of her total investment was $52,900.  That takes the sting off.

This was a bond fund – a safe one so it wasn’t intended for growth.  It was intended for income, in other words, this investment was never meant to knock anyone’s socks off.  A bond fund is all about the income and that is what she got.  Granted $100 in 1985 could buy a lot more groceries than it buys in 2011 but the investment did the job that she wanted it to.

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