Dividend reinvestment enhances the benefits of dividend investing. Every investor should have dividend growth investing as a part of their long term strategy.
Dividends are real; they can’t be faked or created with fraudulent accounting. Long term dividends provide an important indicator of the health of the company paying the dividend.
Instead of taking a dividend in cash an investor can choose to reinvest dividends and receive additional shares of stock. If you have chosen companies with strong balance sheets, rising cash flows, and strategic advantages; dividend reinvestment can provide major long term benefits. Companies that consistently pay and raise their dividend are more likely to have competent management and a solid business plan.
Benefits of Reinvesting Dividends
Here are 5 benefits of reinvesting dividends:
Dollar Cost AveragingBy reinvesting your dividends you are regularly dollar cost averaging back into your investment. When prices are low you buy more shares, and when prices are high you buy fewer shares.
Compound GrowthYour dividends will continue to grow because after each dividend payout you have more shares.
Double Compound GrowthIf 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.
No CommissionsIt’s an efficient way to add small amounts to your position. Even low commissions are costly when making small purchases.
Dividend reinvestment is easy and automatic.Make this your permanent option and your broker will automatically reinvest you dividends on every stock in your account.
Always Reinvest Dividends
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 your cash. This strategy is simple; allows the investor to reap the benefits of re-investing dividends, and promotes the discipline of selling overvalued stocks.
Related Reading: Dividend Growth Compounding Versus Interest Compounding