Monday, June 5, 2017

Reinvest Your Dividends

If you find yourself in a position where you have time and financial security then good job. You're doing something right. Also, investing some of that extra money is a well managed company with a consistent dividend payment it could behoove you. Even better would be to find a company that allows you to reinvest the dividend immediately into more shares. My grandpa sent me a book that speaks on it and, though the book outdated, provides some very valid arguments for reinvesting dividends.

My strongest take-aways regarding the positives of the reinvestment the purchase of shares automatically dollar cost averages for you. Also, there is a pretty good case of making more money* than just receiving the cash dividends and doing it yourself or just keeping it.

Dollar cost averaging isn't always the best decision. It the market has a correction or a recession then it may be smart to buy more of the stock at a much lower price. That way the price won't have to go up as much to make a profit. Much of this depends on how much money is invested in said stock. If you have $100 dollars invested, own 4 shares of a stock that cost $25 and pays out a dividend of $.25 cents, then the dollar cost average won't really happen. If you have $10,000 invested and own 400 shares that pay a 25 cent'd be getting $100 each dividend payout. At the previous market price that would buy yourself 4 more shares. What if the price went down to $20? So then you buy 5 shares instead of 4, increase the amount of shares, and pull the average purchase cost drops. Then next dividend payout you'll get - assuming the same 25 cents and 405 shares - $101.25 and reinvest to get n number of shares. It goes down because you buy more shares when the price is lower and thus drive the price down. Then the more shares owned the more money from dividends and it all circles.

Since dollar cost averaging was the point of all that I'll go into that a little more with some help from "All about DRIPs and DSPs: The Easy Way To Get Started" by George C. Fisher.

Pretty simple explanation of how it works with averages and percentages. In this case it wasn't dividends being reinvested. Just 500 dollars in 5 separate periods. Works basically the same, though. That's the good stuff about dollar cost averaging. Pretty sweet.

And then the case for more money. Sticking with the same $10,000 dollar investment; would you rather make $69,400 over a 15 year period or $35,300? This book shows the difference in compounded return vs not compounded return with the S&P 500 starting in 1980 and ending in 1995.

Compounding means reinvesting the dividends you receive. You can clearly see how outdated this book is. It was published in 2001 and most of the numbers are form the late 80s and 90s. That doesn't take away from the main point that reinvesting the dividends and compounding the return increases the overall return. Shows the evidence of making more money by reinvesting the dividends, though!

Pretty basic. Not much more needs to be said. 

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