WHY YOU SHOULD REINVEST YOUR DIVIDENDS SO THAT YOU CAN MAKE MORE MONEY

As an owner of stocks that pays dividends, there is always a guarantee of receiving dividend payments at the appointed time. However, what you decide to do with these dividend payments lies solely with you. The choice to take your dividend payment as cash or to reinvest it in the stock that just paid you is yours. Hopefully, you would be convinced that it is important to reinvest your dividends after reading this article.

A dividend is basically the direct way a company can distribute your profit (from shares) directly to you; its shareholder. Dividends can be paid out monthly, quarterly, semi-annually or yearly, depending on the company in question. It is important to note that companies are not obligated to pay forecasted dividends, and are free to either cut or cancel payments at any time.

What then is a dividend reinvestment?

Dividend reinvestment simply means using the cash that a company distributes as dividends to automatically purchase more shares of that company stock, each time a dividend is being paid.

Let us take a look at this example:

Assume you own 15 shares of a stock trading at $50 per share, before it pays out a $5 per share dividend. You then make a decision to reinvest the dividends, the $75 total dividend payment (that is $5 per share multiplied by 15 shares) would automatically purchase or reinvest to buy more shares so that you would own 16.5 shares after distribution.  However, if you decide not to go with the option of reinvestment, you would be left with the same 15 shares you started out with as well as an extra $75 of cash in your portfolio.

Besides the usual reinvestment option through stockbrokers, other companies give prospective shareholders the option to purchase stock directly from the company itself, without incurring any transaction fees. This method is called the dividend reinvestment plan (DRIP).

Valid Reasons Why You Should Reinvest Your Dividends

It increases long-term return

From the example analyzed above, where if you owned 15 share at $50 each with a $5 per share dividend; after reinvesting the first $75 total dividend, you now own 16.5 shares of the stock that pays at $5 per share, which is equal to $82.5 of the regular dividend payment (greater than the initial $ 75 prior to you dividend reinvestment.

Assuming stock price remains constant, there would be continual multiplication of the resulting dividend of reinvestment. The multiplication effect is called "compounding”, and can accrue for investors who hold on for the long term.

It is cheap

Dividend reinvestment does not usually attract any transaction fees; of which some brokers charge up to $5-$10 per trade.

It is flexible

Depending on the price of each share, some stockbrokers would not permit you to buy anything less than the price of a single share. However, this is not the case with dividend reinvestment, as it is free from such restriction, and automatically translate into fractional shares when applied to reinvestment.

It is consistent

As you buy shares on a regular basis, you would get your dividends regularly.

It is easy

This is because once it has been set up, dividend reinvestment is automatic.