5 Reasons to Re-Invest Dividends
Dividends are the method by which publicly-held companies share profits with stockholders.
In a mutual fund portfolio that has dividend-paying stocks, the dividends pass through to the fund participants.
When the mutual fund declares dividends, the investor has a choice: receive payment of the dividends or re-invest the dividends by purchasing additional shares of the fund.
Here are five reasons to re-invest the dividends: 1.
You can build the number of shares.
For dividend investors, the goal is to increase the number of shares over time.
Each share that you purchase is credited with a dividend.
As those dividends are re-invested, your share balance grows.
Mutual funds make re-investment of dividends very easy.
When you fill out the application form, there is a section that asks what you would like to do with the dividends.
Check the box in front of "reinvest".
The other choice is "receive cash payment".
2.
There is no out-of-pocket cost to re-invest dividends in most mutual funds.
The declared dividends pay for additional shares.
Even if you don't want to make further deposits to the fund, the shares you own will keep producing dividends.
You certainly can invest more money in the fund if you wish.
But whether you do or not, the dividends will keep increasing your share total.
3.
You can dollar-cost-average.
When you choose to re-invest dividends automatically, the fund purchases shares at regular intervals: monthly, quarterly or semi-annually, depending on when dividends are declared.
The share prices at these intervals will vary, sometimes higher, sometimes lower.
Over time, your shares will have an average cost basis.
The purchases made at lower prices will give you more shares, while the higher-priced purchases give you fewer shares--assuming a constant dividend amount.
The concept behind the averaging is that you will have an opportunity to benefit from market downturns.
When the market rises again, the additional shares purchased during the downturn may have greater growth in value and there will be more of them.
Although averaging is a useful tool, the method does not offer a guaranteed result.
4.
You don't need the income now.
Stock funds are meant as a long-term investment.
Building the value of the investment portfolio takes time.
And building the amount of dividends you want for income payments takes time.
For most people, dividends are a good source of retirement income.
Since you may not need the income now, why not re-invest the dividends to purchase additional shares? Good planning may give you the dividend income you want for a more comfortable retirement.
As with any investment, there is market risk.
5.
You can compound the yield.
The shares purchased with your out-of-pocket dollars will increase by the dividends paid.
The dividends that are re-invested will buy more shares that will also pay dividends.
There will be generations of shares purchased by dividends--and then dividends paid on those shares.
There is a constant cycle of purchases and dividends emanating from the original investment.
In addition, apart from the dividend yield, the share price has the possibility of growth in value over time.
One of the nicest aspects of owning shares of a dividend-yielding mutual fund is that no matter which way the market goes, every quarter when you look at your statement of account you will see that the number of shares you own has gone up.
In a mutual fund portfolio that has dividend-paying stocks, the dividends pass through to the fund participants.
When the mutual fund declares dividends, the investor has a choice: receive payment of the dividends or re-invest the dividends by purchasing additional shares of the fund.
Here are five reasons to re-invest the dividends: 1.
You can build the number of shares.
For dividend investors, the goal is to increase the number of shares over time.
Each share that you purchase is credited with a dividend.
As those dividends are re-invested, your share balance grows.
Mutual funds make re-investment of dividends very easy.
When you fill out the application form, there is a section that asks what you would like to do with the dividends.
Check the box in front of "reinvest".
The other choice is "receive cash payment".
2.
There is no out-of-pocket cost to re-invest dividends in most mutual funds.
The declared dividends pay for additional shares.
Even if you don't want to make further deposits to the fund, the shares you own will keep producing dividends.
You certainly can invest more money in the fund if you wish.
But whether you do or not, the dividends will keep increasing your share total.
3.
You can dollar-cost-average.
When you choose to re-invest dividends automatically, the fund purchases shares at regular intervals: monthly, quarterly or semi-annually, depending on when dividends are declared.
The share prices at these intervals will vary, sometimes higher, sometimes lower.
Over time, your shares will have an average cost basis.
The purchases made at lower prices will give you more shares, while the higher-priced purchases give you fewer shares--assuming a constant dividend amount.
The concept behind the averaging is that you will have an opportunity to benefit from market downturns.
When the market rises again, the additional shares purchased during the downturn may have greater growth in value and there will be more of them.
Although averaging is a useful tool, the method does not offer a guaranteed result.
4.
You don't need the income now.
Stock funds are meant as a long-term investment.
Building the value of the investment portfolio takes time.
And building the amount of dividends you want for income payments takes time.
For most people, dividends are a good source of retirement income.
Since you may not need the income now, why not re-invest the dividends to purchase additional shares? Good planning may give you the dividend income you want for a more comfortable retirement.
As with any investment, there is market risk.
5.
You can compound the yield.
The shares purchased with your out-of-pocket dollars will increase by the dividends paid.
The dividends that are re-invested will buy more shares that will also pay dividends.
There will be generations of shares purchased by dividends--and then dividends paid on those shares.
There is a constant cycle of purchases and dividends emanating from the original investment.
In addition, apart from the dividend yield, the share price has the possibility of growth in value over time.
One of the nicest aspects of owning shares of a dividend-yielding mutual fund is that no matter which way the market goes, every quarter when you look at your statement of account you will see that the number of shares you own has gone up.
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