The S&P 500 Rose 30-Fold Since 1988. Reinvested Dividends Made It 67-Fold.
Why did most of the gap show up only after 2018?
A $10,000 investment in the S&P 500 (^GSPC -0.30%) in early 1988, assuming reinvestment of dividends, would be worth around $673,000 by October 26, 2025. This represents a 67-fold increase, or approximately 11.5% per year. The price of the index alone would have resulted in a 30-fold gain, or about 9.2% annually. Reinvesting dividends added an extra 2 percentage points to the annual return, which significantly amplified the final balance over the 39-year period.
The reinvested dividends effectively doubled the growth of the investment after 2018. For every $10,000 initially invested, the price-only investment yielded about $349,000, whereas the reinvested investment grew to approximately $673,000. Despite dividends not being unusually large during the 1990s and 2000s, their compounding effect over time contributed to more than half of the final value.
While reinvesting dividends doesn't entirely avoid taxes, the impact of taxes is negligible compared to the substantial difference in returns. Index fund investors should continue to prioritize reinvesting dividends for optimal long-term growth, as the dividends, though lower in recent years, still contribute significantly to the overall return.
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