Let’s look at the two scenarios for an investment of €100,000 over a 10-year period. Assumptions: Dividends are reinvested back into the same company (by buying more shares), which is key to maximizing compound interest returns. For simplicity, we assume that the stock price increases at the same growth rate each year.
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💰 Scenario 1: Yield and Moderate Growth (5% Dividend + 4% Growth)
| Parameter | Value |
| Initial Investment | €100 000 |
| Annual Share Growth | 4% |
| Annual Dividend | 5% |
| Total Annual Return | 9% (upon reinvestment) |
| Term | 10 years |
After 10 years:The value of the investment, if the total return is 9% (with full reinvestment of the dividend):
$$PI \times (1 + P + D)^T = €100,000 \times (1 + 0.09)^{10}$$$$\approx **€236,736**$$
Focus: This company is more suitable for investors looking for a more stable current income and lower risk. Dividends provide a faster return on capital and a potential buffer in case of a decline in the share price.
🚀 Scenario 2: High Growth and Low Dividend (10.5% Growth + 1% Dividend)
| Parameter | Value |
| Initial Investment | €100 000 |
| Annual Share Growth | 10.5% |
| Annual Dividend | 1% |
| Total Annual Return | 11.5% (upon reinvestment) |
| Term | 10 years |
$$PI \times (1 + P + D)^T = €100,000 \times (1 + 0.115)^{10}$$$$\approx **€298,652**$$
Focus: This company is more suitable for investors focused on maximum capital growth and who can afford to wait 10 years to realize their profit. The company reinvests more of its profit back into the business, stimulating faster growth.
🎯 Conclusions and Recommendations
The Return Winner: Scenario 2 (High Growth) provides a significantly higher final amount after 10 years – nearly €62,000 more.
The Power of Growth: The higher annual growth of the share price (10.5%) has a much greater impact on the final return over a long period (10 years) than the higher dividend (5%), even when reinvested.
Tax Effect (Important): Dividends are usually taxed in the year they are received. If the investor has to pay tax on a ? % dividend before reinvesting it, the difference in favor of Scenario 2 will be even greater. Capital growth (share appreciation) is taxed only when sold.
Risk: A company with higher growth usually carries higher risk. If it fails to maintain this growth, the investment may fall behind. The company with the high dividend is often more mature, stable, and predictable.
✨ Key Takeaway for the Investor:
For a young investor or one with a long horizon (10+ years) who aims to maximize final capital and can tolerate higher risk, Scenario 2 (High Growth) is the better choice.
For an older investor or one seeking ongoing passive income (e.g. for retirement) and greater security, Scenario 1 (High Dividend) is more appropriate as it provides a higher cash flow today.
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