Why Reinvesting Dividends Makes Good Financial Cents

Here’s why I think reinvesting dividends makes good financial cents.  The best thing about dividend stocks is that they pay investors a steady income.  I’ve owned dividend stocks for over 10 years now and I’m really seeing the benefits of this investing approach. Year after year, quarter after quarter my dividend income has been steadily rising (see my Dividend Income Reports).  A big reason for that growing dividend income has to do with my decision to reinvest all of my dividends.

What is a Dividend?

A dividend is simply a piece of a company’s profit that is paid out to shareholders.

Why Reinvest Dividends?

Here are 4 big reasons I think Everyone should reinvest their dividend income:

1. Get your money working for you.

When dividends are reinvested, the compounding begins to happen and your money is working for you.  This will grow your financial assets and your investment income.  Many studies have found that reinvested dividends can contribute anywhere from 30% to 70% of the total stock market returns.

2. Your dividend income will grow over time.

This is the snow ball effect where, in the beginning, the increases are small, but over time they grow larger and larger.  Some investors and retirees are able to live off of their dividend income.

3. Reinvesting Dividends saves you money on commissions.

Smart investors know that when it comes to investment returns, the big killer is the fees and commissions.  By reinvesting dividends, investors are purchasing more shares commission free.

4. Some companies offer small discounts on shares purchased with reinvested dividends.

Not only will you save on commissions, but in some cases the company will also offer investors a discount (anywhere from 2%-5%) on the shares purchased with the reinvested dividends.

Things to Consider

If you have a discount brokerage account, the dividends you receive from an individual company must be enough to buy 1 share or else the cash will be deposited into your account.

If you want to start reinvesting your dividends today, then call your discount broker and make the request.  I deal with Questrade and TD Waterhouse and haven’t had any problems with either of them.

Alternatively, you may consider starting a Dividend Reinvestment Plan (DRIP).  These plans will invest 100% of the dividends you receive and purchase fractional shares.  Check out my articles on these types of plans here.

Thanks for reading and keep on investing!