Superior Equity Group – Why Dividend Reinvestment Matters

Written by admin on December 6th, 2010

One of the most rewarding things about being an investor can be a dividend check.   Every three months or so, investors, depending on the stocks or other funds they’ve invested in, open their mailboxes or check their bank accounts to see this payment.  The best thing to do is rush right out and spend it, right?

Well, no.   That sort of defeats the purpose of investing, doesn’t it?

Some dividend checks can be rather small, especially given how easy it is to invest these days, and it’s quite possible for some shareholders to hold one share, or very few shares.  Depending on what the dividend is per share, it’s possible that such a check could be less than a dollar.  Of course, for the investors that hold hundreds or even thousands of shares, it’s a glorious payday.

While there’s nothing wrong with enjoying a little of that money, wouldn’t it be a smart idea to put it right back into the stock market, purchasing even more shares of that company, another company, or even into an IRA account?

Not every company pays out dividends.  It all depends on the financial health of the company, and given the general state of financial affairs, it may not be a given that an investor will get a dividend.  So, then, when an investor does get a dividend check, they should take that into account when deciding whether to spend the money frivolously, or set aside some or all of it for savings or reinvestment.

Every investor likes to have a full portfolio.  Sometimes, money’s tight, and not everyone can invest as much as they’d like.  A dividend check is essentially unplanned money, so reinvesting it won’t cause any severe harm unless it means not spending it will mean the difference between having a home or not.

For the average person who isn’t experiencing any major financial difficulty, the decision to reinvest that dividend check could be a wise one.   They might want the money now, but they will appreciate it 30 or 40 years down the road when their stock portfolio is more well developed than they planned, because they invested those dividend checks.

Here’s a scenario: suppose you want to invest in a company like Google, but you just don’t have the money.  You’ve already made some wise investment choices, so one day you open your mailbox to find two dividend checks.  With those checks, you can purchase two shares of Google.  Or, you can have a night out on the town with your friends.  Which choice is wiser?

Sure, it’s more fun to go out with friends, but the reality is that when the night is over, you’ll have nothing to show for it.  Then, “buyer’s remorse” will more than likely kick in, because you could have done something smart with that money, and you frittered it away instead.

By turning around and investing in something you wouldn’t otherwise have the money to do, you’ll not only be increasing your portfolio, but you’ll have something substantial and tangible to show for it, especially if you invest in a major company such as Google or even Go Daddy, if they ever go public.


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