How Much Do You Lose by Not "Reinvesting" in Monthly Dividend ETFs? The Truth About Compound Interest Revealed in a 5-Year Test

Today, I want to talk about a hot topic in ETF investing right now: “monthly dividends.” This concept has been a major point of discussion in Taiwan’s ETF market recently. But no matter how much debate there is, I personally think it’s unnecessary because not having dividends is better than having them. You might not realize how much potential profit you could be losing with a monthly dividend plan. Don’t worry, let’s take a humorous approach to understanding this issue.

Monthly Dividends Seem Attractive

Instant Gratification: Small Monthly Cash Flow

You know, whenever you receive money, no matter how small, it always makes you happy. Monthly dividends are like a small monthly cash flow, providing instant gratification! But this sweetness of monthly dividends is like a sugar-coated poison.

Stable Cash Flow: Planning More Wonderful Things

With monthly dividends, you can ensure a stable cash inflow every month. This means you can plan more things, like fancy dinners, vacation plans, and more random shopping. Maybe they’re small joys, but over time, they become a major misfortune in a chronic way.

Investor Self-Pampering: Feeling Specially Treated

Monthly dividends feel like “special treatment” for investors. You pay, it gives back, it feels good. There’s always a little self-pampering involved. It’s like throwing bread out and the dog bringing it back. Will I still get rich?

Compound Interest vs. Monthly Dividends: Who is the King?

However, when we strip away these beautiful facades, reality begins to emerge. Is the beauty of monthly dividends limited to instant gratification? Let’s conduct a small experiment to see if monthly dividends are really that popular in the long run.

Scenario 1

Invest NT$10,000 (USD 310) Monthly, 10% Annualized Return, Invest for 10 Years (May Not Feel It)

First, let’s consider a scenario: you invest NT$10,000 (USD 310) every month and expect an annualized return of 10%. Sounds good, right? Now, we’ll divide this scenario into two different investment methods, one with no withdrawals and the other with a 2% quarterly withdrawal. We’ll use a table to compare these two methods.

Look, there’s an amazing discovery here! If you invest NT$10,000 (USD 310) every month and don’t withdraw, you’ll eventually have NT$1,590,847 (USD 49,316). But if you withdraw 2% every quarter, you’ll only have NT$1,363,312 (USD 42,260). This means that while you received some dividends every quarter, your total investment return was affected, with a difference of NT$227,535 (USD 7,056)! A difference of about NT$230,000 (USD 7,130) in ten years is equivalent to losing NT$20,000 (USD 620) per year (but you may not feel it).

Scenario 2

Invest NT$10,000 (USD 310) Monthly, 10% Annualized Return, Invest for 30 Years (Loss of NT$1.8 Million / USD 55,800)

Now, let’s look at a longer-term scenario. Suppose you continue to invest NT$10,000 (USD 310) every month, the annualized return is still 10%, but this time we extend the investment period to 30 years. Similarly, we’ll compare the situation of not withdrawing and withdrawing 2% every quarter.

This time the difference is even more obvious! In a 30-year investment period, if you don’t withdraw, you’ll eventually have NT$5,749,550 (USD 178,236). But if you withdraw 2% every quarter, you’ll only have NT$3,958,645 (USD 122,718). This means that a long-term monthly dividend strategy will make you lose NT$1,790,905 (USD 55,518)! This time, with 20 more years, you lose a total of NT$1.8 million (USD 55,800). Can you still say you don’t feel it?

Einstein: Compound Interest is the Eighth Wonder of the World

Based on the above two cases, my belief in Einstein’s statement about compound interest is even stronger. Compound interest plays an important role in investing. It can achieve rapid asset growth and create lasting wealth for us.

The magic of compound interest lies in its cumulative effect. Each time we receive interest or returns, these gains will be reinvested, further generating more interest and returns. Over time, this cumulative effect will become more and more obvious, and the rate of asset growth will become faster and faster.

For example, if we invest a sum of money in a compound interest manner, earning a 10% return each year without withdrawing any gains, we will see exponential asset growth over the long term. This is why Einstein described compound interest as the “eighth wonder of the world.”

However, we also need to be cautious about the risks in investing. Although compound interest can bring huge returns, market fluctuations and risks may also cause losses to assets. Therefore, in the investment process, we need to manage risks well and choose investment methods that suit our risk tolerance.

In conclusion, compound interest is a powerful and important investment principle that can help us achieve financial freedom and long-term stable wealth growth. Whether it is investing in the stock market, real estate, or other fields, compound interest is one of the keys to our success. So, let us continue to believe in and use the power of compound interest to lay a solid foundation for our future.

Further Reading

懶得變有錢 (Lazy to be Rich)’s Conclusion

懶大

金融科技新創 CEO | 獨立財務顧問

So, let’s summarize. Although monthly dividends sound attractive, in the long run, they may cause you to lose considerable investment returns. In the above two cases, NT$1.8 million (USD 55,800) was directly lost. Of course, this is not to say that dividends are necessarily bad. They have their uses, but when investing, please carefully consider the impact of withdrawing dividends. The goal of long-term investment is to accumulate wealth. Don’t let the temptation of short-term dividends affect your long-term goals.

If you want to invest in the US stock ETF market, you can also refer to this article: 【Investment】“Long-term” Investing in US Stocks: Multiple Delegations are Better than Overseas Brokerages

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