Should I Stop Reinvesting Dividends?

Should I Stop Reinvesting Dividends?

This is when dividends will not be reinvested

This is when dividends will not be reinvested

Is there a point where I should stop reinvesting stock dividends and invest the money or save the money?

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Many financial experts recommend that you reinvest dividends most of the time – and I’m inclined to agree. The process is usually automated, incurs no fees and gives your holdings a little (or a lot) of extra oomph.

For example, if you had invested in Microsoft stock 10 years ago and reinvested your dividends consistently since then, your holdings would be worth 63% more today than they would have been unless you reinvested. That’s a lot of oomph.

Still, there is hardly a one-size-fits-all answer to any investment question. Accordingly, it may be wiser in some cases to take the money rather than reinvest it.

Here’s what investors should know about when it makes sense not to reinvest dividends.

A financial advisor can help you fine-tune your investment strategy. Find a local consultant today.

3 Good Reasons Not to Reinvest Dividends

This is when dividends will not be reinvested

This is when dividends will not be reinvested

While reinvesting dividends will almost always return your stock holdings, sometimes your big picture needs as an investor will outweigh those potential benefits.

Here are three common examples of situations where it makes sense not to reinvest dividends:

  1. Balancing your portfolio. Reinvesting dividends will increase your position in the company that pays them. If that company already represents, say, 5% or more of your portfolio, it might be wise to avoid overconcentration and not reinvest your dividends.

  2. Step out risk. In many cases, it’s a good idea to make your investments less aggressive over the years. If you are reinvesting dividends, it may be a good way to divert that cash towards less aggressive assets (like bonds) to gently “risk off”.

  3. Income. Remember: Money has to be spent eventually, and sometimes all you need is the money. There’s nothing wrong with that, especially if you’re in or nearing retirement when short-term income is a bigger priority than long-term growth.

1 Bad Reason Not to Reinvest Dividends

This is when dividends will not be reinvested

This is when dividends will not be reinvested

Some people will say that you shouldn’t reinvest dividends if the underlying stock isn’t doing well. Here, however, I completely disagree.

Remember, one of the main benefits of dividends is that they pay out regardless of the stock’s recent price movement. This shows that the company paying them has an established track record of earning a profit – a clear sign that the company is fundamentally worth investing in.

In other words, even if the share price is in a slump, there is every chance that it will eventually recover. So if you’re going to hold the stock anyway, and therefore continue to receive dividends, why not get the added boost of reinvesting them?

As I like to remind my clients, we invest in companies, not stocks. The share price is only one indication of a company’s value, and sometimes a very unreliable one. That truth is often forgotten and is always important.

What to do Next

If you’re not receiving dividends and aren’t sure what to do with them, remember the basics.

It’s worth answering three questions: deciding what to do with your dividends:

  1. Do I trust the fundamental health of the company?

  2. Can I afford to reinvest the dividend income now?

  3. 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 money elsewhere.

If you can answer all of them with “yes,” however, let the reinvestment machine continue to do its thing.

Investment and Retirement Planning Tips

  • If you have questions specific to 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 advisor at no cost to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, get started now.

  • For more information about dividend investing see this article on the subject.

  • When planning your retirement income, keep an eye on Social Security. Use SmartAsset’s Social Security calculator to get an idea of ​​what your benefits might look like in retirement.

Graham Miller, CFP® is a SmartAsset financial planning columnist and answers reader questions on personal finance topics. Have a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Note that Graham is not a participant in the SmartAdvisor Match platform.

Photo credit: ©iStock.com/visualspace, ©iStock.com/gorodenkoff

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