Have You Heard About the Power of Reinvesting Dividends?
Dividends can be a valuable piece of your investment strategy. Reinvest them? Or accept them as cash? Let's talk about the dividend choice that makes sense for you.
By: Edward Jones
Increase Share Ownership
An important part of investment success is increasing the number of shares you own in your stocks or mutual funds — and reinvesting dividends can help you do just that. Many stocks and mutual funds, along with a lesser number of exchange-traded funds (ETFs), offer dividend reinvestment plans, known as DRIPs, which allow you to automatically direct your dividends toward the purchase of additional shares. Most financial services firms also offer reinvestment programs. Reinvesting through your financial services provider gives you the convenience of having all your investments in one place, which may also make it easier for you to follow a unified, long-term strategy.
Keep in mind, however, that even if you reinvest dividends, you still have to pay taxes on them as if you actually received them in cash. If your dividends come from investments held in a tax-deferred account, such as a traditional IRA or a 401(k), you won't pay taxes until you start withdrawals, typically during retirement.
Improve Your Returns
While reinvesting dividends can help you accumulate more shares of your investments, it can also be beneficial in another way — by helping you potentially improve your overall return. Consider this: In 2015, the S & P 500 index was down 0.73% — its worst performance since 2008. Yet, after accounting for reinvested dividends, the index was actually up 2.35%. Furthermore, dividends have accounted for about 43% of the S & P 500's total return since 1930.* So, dividend-paying investments can complement other investments that pay smaller dividends — or no dividends at all.
When Should You Take Dividends?
As we've seen, reinvesting dividends can be beneficial by boosting your share ownership and potentially improving your long-term returns. But at some point in your life, such as when you're retired, you may need to start taking your dividends in cash to help boost your cash flow. In fact, once you're retired, you could use dividends from individual stocks as a source of rising income to help combat inflation. Over time, even a modest rate of inflation can seriously erode your purchasing power, so you may want to look for those "dividend growers" — companies that not only consistently pay dividends but also have a history of increasing dividend payments. Be aware, though, that there are no guarantees; companies can reduce or discontinue their dividends at any time.
Dividends can be a valuable piece of your investment strategy, whether you reinvest them or accept them as cash. An Edward Jones financial advisor can help you determine which choice is appropriate for you.
*Past performance is not a guarantee of how the market will perform in the future. The S&P 500 is an unmanaged index and is not available for direct investment. Example is for illustration purposes and does not reflect an actual investment.
Edward Jones - Matt McDonald: Financial Advisor