Reinvesting Dividends When Stock Trading

reinvesting dividendsMany have the question when going to purchase a stock or mutual fund, "What does the dividend reinvest option mean, and should I do it?"

First of all, for those that are not aware of it, there is usually a dividend reinvest option that your trading account offers you when taking a new position. If it is not there visibly, call your brokerage company.

For my platform, I am given the option to check the dividend reinvest box right before confirming my trade.

To start it off, dividends are cash distributions given by companies to their shareholders following a profitable time period. For the most part, companies have two options when dealing with profits.

First, companies can choose to retain earnings in the company, making the company ultimately worth more (higher asset value), thus hoping to increase the stock price. Apple is a prime example of this. Rarely will you receive a dividend from Apple, however, owners have enjoyed a rather steady increase in their stock price.

The other option companies have is to share a portion of their profits with their shareholders. Sure, for the most part, this is not anything significant due to the amount of shareholders, but you might be surprised at how big dividends can be. Because of the cash distribution, stock volatility is usually much lower. Verizon is a good example of this, as they have really low volatility with a rather strong dividend for investors.

Neither approach is ultimately better than the other. It all depends on the individual company and how they choose to handle it. From an investment standpoint, the two different scenarios can be more intriguing, depending on your investment goals. For instance, I prefer to load up on high yielding dividend stocks for my retirement accounts, because over time, the dividends can pay off, despite the stock price moving with lower volatility.

In addition, I always choose to reinvest my dividends. By doing this, I then utilize the principle of compound interest. When reinvesting your dividends, you opt out of taking the cash and purchase more shares with it instead. Thus, after time, you can end up with double or triple the shares you started with, while continuing to earn dividends from the increased shareholding. Hopefully, if the company remains strong, your position will be great increased over time.

Dividends are an important trading principle to consider when taking a position. For some portfolios, it will not make sense to buy dividend yielding stocks, for others it definitely will. Happy Trading.

3 comments:

  1. Penny Stock Investments Says:

    Buying a stock just before the x dividend date is a great idea.

  2. QUALITY STOCKS UNDER 5 DOLLARS Says:

    Some excellent points in the post.

  3. Learn Stock Market Says:

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