Tahoe-Truckee Market Beat: Whether or not to reinvest in dividends
Special to the Sun
One question investors are faced with is whether they should reinvest their dividends or not.
A cash dividend is a payment made by a corporation on regular basis, usually quarterly.
The decision on whether to reinvest is an individual matter. If income is your goal, you probably want to receive your dividends in cash.
If you don’t want to accumulate any more shares of the stock or fund paying the dividends, then electing to receive them in cash makes more sense too.
There are some advantages to reinvesting your dividends, especially if your goal for the investment is long-term growth.
One advantage is that you get to purchase more shares of the stock or ETF without any commission cost. Keeping your costs as low as possible over time will enhance your investment return.
Another advantage is that dividend reinvestment is a form of dollar cost averaging, which is defined as investing a set amount of money on a regular schedule.
That way you take advantage of the market’s inevitable volatility by adding to your investments frequently.
If you’re reinvesting a cash dividend that is paid on a quarterly basis, you’ll be adding shares to your stock position four times per year.
If you hold your stock long term, you can accumulate a substantial amount of stock over time through a dividend reinvestment program.
I once worked with a client who held a large concentrated position in a Fortune 500 company that went public way back in 1931.
The family was one of the largest private shareholders of the company and had held shares since the initial public offering in 1931.
They had reinvested their dividends all along the way, and the amount of stock they had accumulated by reinvesting dividends over a 70-year-plus period was staggering.
That was the best real life example of the power of dividend reinvestment that I have ever seen.
Whether or not you should reinvest your dividends depends on your personal objectives.
If your goal is to accumulate a large position in a stock or ETF, dividend reinvestment can be a good tool to accomplish that goal with low costs.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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