Dividend reinvestment can help you make money while you sleep: Here’s why | Smart Change: Personal Finance

(Matthew Gutierrez)

There is a timeless investment strategy that is older than most publicly listed companies today. The strategy requires very little time and effort, and it can greatly speed up the complexity process in your portfolio. There are no fees. Additionally, you can set the strategy to automatic in your brokerage account for consistency. It seems too good to be true.

The strategy is called Dividend Reinvestment, and it is propagated by novice investors and some more experienced Wall Street professionals, such as Warren Buffett. Dividends are bonuses (usually cash) that a company or fund gives to its shareholders on a per-share basis. Companies with good profits and excess profits can reinvest the cash in operations, pay off debts, or pay dividends to reward shareholders.

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High inflation, slowing GDP growth, the Russo-Ukrainian war and supply chain challenges are straining the stock market. In short, it is a reminder of the power of using a diversified portfolio that is not highly concentrated in any single sector. Some investors prefer to “take a defensive stance” at such times, or shift their portfolios to a more conservative stance. One way to make it happen: Dividend stocks, which are reliable, and dividend yields represent a steady stream of income even when the markets are heading south.

How it works: Your dividend buys more shares, which increases your dividend yield next time, allowing you to buy more shares, etc. For example, suppose you own 1,000 shares of stock at $100 each, with a total investment of $100,000. Assuming a 3% dividend yield, this means that $3,000 in profits you can reinvest in your investment.

How to reinvest profits

Investors can register for automatic dividend reinvestment programs through their brokerage account, usually in the account settings menu. You will have the option to auto-record all current and future stocks and funds or select individual stocks and funds for automation.

Some investors get cash dividends in their pocket to pay bills or invest in other stocks. But spontaneous reinvestment can pay off, especially over longer time horizons of several years (or more). Reinvestment of profits is cheap and automatic, with no fees. It’s easy, flexible – you can get partial shares by reinvesting dividends – and consistent: you can buy shares on a regular basis, like every quarter.

Dividends don’t have to be for retirees only

You may have heard stories of retirees living on dividends. It is a dream for many people to simply cover their costs in retirement thanks to the quarterly dividend payments. The strategy helps preserve capital and generate an increased income stream, regardless of market conditions. For these retirees, not reinvesting your earnings may make sense, so you can have that cash on hand when you need it. Additionally, reinvesting profits may not be a sound strategy for people who need those profits to cover bills, pay off debt, or balance their investment portfolio.

But for many investors, regardless of your age or investing experience, automating the processes of reinvesting your earnings is an important mechanism for increasing returns. drip (Dividend reinvestment programs) Investors are allowed to benefit from dividends in a laissez-faire manner.

It’s also an ideal use case of dollar cost averaging, a strategy in which an investor splits the total amount to be invested across periodic purchases of a target asset class to minimize the impact of volatility. Purchases occur regardless of the price of the asset and at regular intervals.

Investors can increase growth by putting in place mechanisms to reinvest profits. Just as it helps to keep investing during the inevitable ups and downs in the market Avoid missing the best daysAutomatic dividend reinvestment is another low-effort way to grow your wealth.

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