Is there a point where I should stop reinvesting stock dividends and invest the money or save the money?
Many financial experts recommend reinvesting dividends most of the time – and I tend to agree. The process is usually automated, comes at no cost and gives your property a little (or a lot) of extra appeal.
For example, if you had invested in Microsoft stock 10 years ago and consistently reinvested your dividends since then, your holdings would be worth 63% more today than if you hadn’t reinvested. That’s a lot of oomph.
Yet there is almost never a ready-made answer to an investment question. Accordingly, in some situations, it may be wiser to just take the money rather than reinvest it.
Here’s what investors need to know if it makes sense not to reinvest dividends.
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3 good reasons not to reinvest dividends
While reinvesting dividends almost always gives your stock ownership a chance, sometimes your general needs as an investor will trump those potential benefits.
Here are three common examples of situations where it makes sense not to reinvest dividends:
Balancing your portfolio. By reinvesting dividends, you increase your position in the company that pays them. If that company already represents, say, 5% or more of your portfolio, it may be wise not to get too concentrated and not reinvest your dividends.
Reduce risk. In many cases, it’s a good idea to make your investments less aggressive over the years. If you’ve reinvested dividends, redirecting that money into less aggressive assets (such as bonds) can be a good way to “take risks” smoothly.
Income. Remember, money is ultimately for spending, and sometimes you just need the money. There’s nothing wrong with that, especially if you’re retiring or nearing retirement when short-term income becomes a higher priority than long-term growth.
1 bad reason not to reinvest dividends
Some people will say that you should not reinvest dividends if the underlying stock is not performing well. However, I don’t agree at all with this.
Remember, one of the main benefits of dividends is that they are paid regardless of the stock’s recent price movements. This indicates that the company paying them has a proven track record of making a profit – a clear sign that the company is fundamentally worth investing in.
In other words, even if the stock price is in a dip, there is a good chance that it will eventually recover. So if you want to keep the stocks anyway and therefore continue to receive dividends, why not get the extra boost by reinvesting them?
As I would like to remind my clients, we invest in companies, not stocks. Share price is only one indication of a company’s value, and sometimes a very unreliable one. That truth is often forgotten and always important.
What to do?
If you receive dividends and aren’t sure what to do with them, remember the basics.
Deciding what to do with your dividends boils down to answering three questions:
Am I confident in the underlying health of the company?
Can I afford to reinvest the dividend income now?
Is increasing my position in this company consistent with my overall portfolio strategy?
If the answer to any of these questions is “no” or “I’m not sure,” you may want to spend that dividend elsewhere.
However, if you can answer “yes” to all of them, let the reinvestment machine do its job.
Tips for investing and retirement planning
If you have specific questions about your investment and retirement situation, a financial advisor can help. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
For more information about investing in dividends, see this article on this topic.
When planning an income after retirement, keep an eye on Social Security. Use SmartAsset’s Social Security Calculator to get an idea of what your benefits could look like when you retire.
Graham Miller, CFP® is a SmartAsset financial planning columnist, answering reader questions about personal finance topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Graham is not a participant in the SmartAdvisor Match platform.
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