The reinvestment of capital gains and dividends can make a significant difference in your total return. Consider the following situation to determine the difference reinvestment can make over a 5-year period.
Initial purchase amount …………………………………. $10,000
Initial purchase date ……………………………………. January 1
Initial purchase price …………………………………… $19.30 per share
Annual capital gains distribution rate ………………….. 1.5%
Annual dividend distribution rate ……………………… 0.6%
Annual price appreciation rate …………………………. 7.4%
Assume all distributions are made on the last day of the year at the closing NAV. Ignore tax consequences for the scenarios in a and b, below.
a. Calculate the ending investment value plus the total of distributions received assuming no reinvestment.
b. Calculate the ending investment value assuming all distributions are reinvested.
c. Calculate and explain the difference.