When you have some kind of investment that pays dividends,
or makes regular payments of some kind, you may wonder if
that is the best way to go. Dividends usually come in more
than one form, but it will usually either be cash sent to
you, or a cash amount that is reinvested into buying more
stock for you. With this in mind, here are some thoughts
about why one may be much better than the other.
Companies that give stock may give you the option of which
method you prefer. You decide whether you want the cash, or
having your money reinvested into more shares of stock.
When you receive a dividend from stock, you will, in most
cases, need to pay taxes on that amount - whether or not
you actually receive any cash. So, this will largely rule
out the tax angle in making your decision about which may
be the better way to go.
Being given cash from stock, however, will have an effect
on your stock. Since stock increases and decreases in value
over time, stock is considered to be a worthwhile long-term
investment. This is especially true when a company is
successful and its stock increases in value.
Getting a percentage of your shares back every so often is
actually a removing of a portion of your investment - if it
comes to you in the form of cash. Unless you take that same
amount and reinvest it into some form of interest bearing
account, you are actually losing money that you could be
consistently earning on.
If that dividend is reinvested into purchasing more stock,
then this is by far the better choice. As your stock
increases, you will actually be earning interest on your
interest. This is compound interest, which is of far more
value than you can earn in many institutions. Over time,
this interest on interest could soon double the amount you
have in that stock.
Do not let getting a dividend fool you, though. Just
because a company pays a dividend does not mean that the
company is actually doing well financially. You should
consider selling that stock if you could find one with
greater profitability somewhere else - and get even greater
dividends for even more reinvestments.
If the stock value is good with that company, however, then
you should stay with it. Consider the amount of your
initial investment, the profit you have now, and if the
stock is increasing in value, why not just stay with it? If
it is good company, the stocks will gain in value if the
economy permits it.
Watch out for the company that allows you to reinvest the
dividends, but at a cost to you. While many companies do
this, you may have the option to change it at any time
simply by filling out a form and submitting it to the
company. It may be easier and cheaper to see if the company
will allow you to automatically reinvest any dividends
because there may not be any charges for this service. This
increases your overall value instead of reducing it with
cash dividends.
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