Reinvesting dividends provides benefits that shouldn’t be ignored. If fact, I’ll go so far as to say that almost everyone should reinvest their dividends regardless of their age or personal situation.
How to Reinvest Dividends Benefits
We all love dividends. Dividends provide income and receive favorable tax treatment. As companies grow earnings and raise their dividend their stock prices usually follow in the long run.
Dividends are also an important indicator of the value of a stock. A company that is able to consistently raise its dividend probably means they are consistently growing their earnings too. Growing dividends helps to identify well managed companies that have confidence in their future earnings. The companies that raise their dividend year after year are usually the best companies.
If you follow a value investing strategy in which you maintain a portfolio of stocks that offer a margin of safety there is never a time when you don’t want to be buying more shares of the company you own! That makes reinvesting dividends a no-brainer.
Benefits of Reinvesting Dividends
Instead of taking a dividend in cash an investor can choose to reinvest dividends and receive additional shares of stock.
Here are 5 benefits of reinvesting dividends:
Dollar Cost Averaging
By reinvesting your dividends you are regularly dollar cost averaging back into your investment. When prices are deflated you buy more shares, and when prices are elevated you buy fewer shares.
Your dividends will continue to grow because after each dividend payout you have more shares. The benefits of exponential growth are multiplied by growing dividends. This is because both the number of shares (from reinvestment) and the dividends per share are growing.
Double Compound Growth
If you own a stock that is consistently raising its dividend your dividends per share will be growing in addition to your number of shares growing. The exponential power of dividend growth compounding can provide competitive returns regardless of whether the price of the stock increases in value or not.
Dividend reinvesting is an efficient way to add small amounts to your position. Even low commissions are costly when making small purchases.
Dividend Reinvesting Is Easy and Automatic
Make this your permanent option and your broker will automatically reinvest your dividends on every stock in your account.
What If You’re Retired and Live On Your Dividends?
The benefits of dividend reinvesting are even greater for the retired investor. Why? It forces the investor to look for, and sell, their most overvalued assets.
Investors who are retired or require income can take a monthly check from cash and periodically sell positions of appreciated or overvalued stocks to replenish cash. This strategy allows the investor to reap the benefits of reinvesting dividends, and promotes the discipline of selling overvalued stocks.
This article has been republished with permission from Arbor Investment Planner.