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Reinvesting Dividends Benefits

by | Investment Basics

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. Whether we choose to re-investing each dividend or take the dividends in cash and re-invest in other positions; re-investing dividends have major benefits. 

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.

Reinvesting Dividends

Benefits of Reinvesting Dividends

Here are 5 benefits of reinvesting dividends:

Dollar Cost Averaging

By reinvesting your dividends you are regularly dollar cost averaging back into your investments. When prices are deflated you buy more shares, and when prices are elevated you buy fewer shares.

Compound Growth

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.

No Commissions

Dividend reinvesting is an efficient way to add small amounts to your position. In the day and age of no commissions it’s easier and more efficient  than ever to re-invest dividend either automatically or take dividends in cash and purchase shares of other stocks that may be a better option at any particular time. 

Automatic Dividend Reinvesting Is Easy

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.

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Disclaimer
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.

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