- December 7, 2022
- Posted by: Karl B
- Category: Dividends
Alright, listen up.
I see dozens of people making a rookie investor mistake over and over again.
What’s the mistake I see being made?
Someone blindly reinvesting dividends. Sure it’s easy. Some brokerage accounts have a little check box.
It says: REINVEST DIVIDENDS?
You just check the box and go on your merry way, knowing you’ve done a smart thing.
While I applaud you for doing the smart thing and making sure your money is always working hard for you… you just made a mistake. You blindly invested your money without considering the other options.
Look, is it the end of the world? NOPE. Is there a better way? ABSOLUTELY.
The Secret To Reinvesting Dividends
Think about this…
Stocks go up and down every day. Business results change all the time. When you think about buying a single dividend stock, you do your research. You look at the chart, you check the ownership and debt structure. You measure the dividend and the yield. You study the financials and look at the cash flow numbers. You do your diligence.
Most importantly, you look at the valuation of the business and your expected returns.
Then you pull the trigger and invest a slug of money into your dividend stock of choice.
So, I see the question in your mind…
I just did all this research, why is it so bad to simply reinvest my dividends back into the same stock?
The answer is simple…
Things Change
Consider this – if you start reinvesting all your money back into the same stocks, you most likely won’t have any “Dry Powder” (aka uninvested cash) ready to deploy.
This is a big mistake.
What if the stock price falls on one of your favorite dividend payers? What if suddenly the dividend yield jumps another 1%, 2% or 3%…
Don’t you want the flexibility to invest your money into the BEST INVESTMENT IDEA at the moment? That’s why I always get my dividends paid in cash.
Then, when I have a bit of money sitting on the sidelines, I start looking for a new investment. I start with the stocks I already own. I look at those dividend paying stocks I’ve already done the research on and I examine them closely.
Might the market have fallen recently? My favorite stock might now be on sale!
Maybe investors are focused on a HOT new industry – and have abandoned a great cash flowing business!
The yields will be up – and that’s a ripe juicy apple I want to pick!
Maybe a stock I own has hit a rough patch – and the stock price has fallen. As long as the dividend looks safe to me, I’ve got no problem putting more money into a great dividend stock.
Only after looking at all my holdings do I then consider other new dividend investments.
Squeeze Every Penny
Look, in the wide world of mistakes, this isn’t a deal breaker. But, if you’re like me… and you want to squeeze every single penny out of your dividend stocks… then DO NOT blindly reinvest your dividends.
Instead, collect the cash, and reinvest it where you think it’s going to grow and give you the biggest returns.
Tell me… do you reinvest your dividends?
Do you save them up and deploy them like I do… or do you automatically reinvest the dividends back into the same companies?
Comment below and let me know what you do!
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3 Comments
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A mist thought-provoking article – many thanks. I am a long-haul investor with an auto reinvestment account, which buys stock at a 3-5-per-cent discountt each pay day, thereby optimizing the work being done by my money.
When my expenditure on any stock reaches 2.5% of my overall total original investment program, I remove it from the auto plan and invest its dividends in another stock, either new or already in my portfolio.
So my plan is expanding both upwards and outwards and my risk exposure is kept fairly minimalistic. I’m not sure I could do better by leaving the auto reinvestment system entirely but I do see the wisdom of your argument.
Appreciate the comment Ian!
I am almost as smart as you are (in this area of finance). I keep tabs on my dividends and reinvest buying more stocks of the same company by setting Robinhood to buy at a lower price, or new companies.