When to Pocket Dividends and When to Reinvest
What to do with those quarterly or monthly payouts ...
In this issue of Investing Daily Dose (IDD):
💰The Dividend Dilemma💰
When we ran our series on Dividend Aristocrats last week – you can catch up on all the guides here – we had a great question come in, asking, “How do I know if my dividends are being reinvested?”
It depends on your specific brokerage, but generally, there should be a dividend reinvestment program (DRIP) option available for you to enroll your dividend-paying stocks.
In Robinhood, for example, the DRIP program is found in the account settings:
When you reinvest the dividends, those dividends buy more shares, therefore, amplifying your potential total return from a stock.
Using AbbVie Inc. ABBV 0.00%↑ from last week as an example, you can see the difference that reinvesting dividends makes:
If you reinvested the dividends, your total return since 2013 was 638.39% compared to 483.29% if you had just pocketed the dividends.
That means with reinvesting the dividends, every $10,000 you invested would be worth $73,816.99.
Without reinvesting the dividends, that return would be $58,310.74.
This leads to another good question about dividend reinvesting and age.
At what point in your “investing career” is it better to keep those dividends over reinvesting them?
While we can’t provide personalized financial advice, Bill Patalon, Chief Stock Picker, can share some general insight.
Bill’s Investing Takeaway
“I’m a huge fan of dividend reinvesting – and for the simplest of reasons: It keeps it simple. You’ll see a lot of debates and calculations … but for me it comes down to that simplicity. You buy a stock – and if you’ve embraced being a Wealth Builder, you’re holding it for the long haul, and are plowing those dividends back in to buy more shares.
You never ‘see’ those dividends. So you never miss that money. You don’t have to make decisions about ‘where do I invest this money?’
You keep buying shares. And, over time, your ‘stake’ builds up. It’s a stock you obviously like … otherwise, you wouldn’t be holding it.
This is absolutely a great strategy for younger investors … you know, folks with a long-time horizon. But it’s appropriate for anyone. These days, we need to keep building wealth – even as we get older … because we don’t want to outlive our money.
I believe in this so much that I do it myself. There’s one stock that I own … that I’ve owned for years, in fact … and once it started paying dividends, I reinvested them from the start.”