If we start to think rationally (I know, this is a big “If”…), we think that the only way to profit from one’s stock holdings is to sell some of one’s stock. How else would one get cash?
Logic
It’s a logical thought. If we buy stock for the purpose of selling it someday for a higher price, then, yes, it seems to be the way to go. It’s a logical thought, but…
A Different Way
There’s a different way to get cash. It is from the dividends. We get dividends when we don’t sell. It is as simple as that.
Dividends paid
We get dividends only when we hold the stock. This is contrast to selling. When we sell a stock we get cash only if we let go, relinquish ownership. This is the significant difference.
Keep the stock = get dividends
Sell the stock = get sale price
Our dividends continue indefinitely as long as we hold the stock. If we sell, we get the sale price once, and nothing further.
The longer we hold stock, the more dividends we get. In fact, if we hold stock long enough, it is possible to get back one’s initial investment in dividends, or close to it. It all depends on the dividends, the yield, the valuation, and other factors. But getting a significant portion of one’s investment back in the form of dividends makes this form of investing a solid method of increasing one’s wealth.
It Gets Better
When we hold dividend-paying stock with dividends reinvested, then our holdings increase automatically every time a dividend is issued. It’s like getting a gift (usually) four times a year just for being there. And the more fascinating fact is that our holdings grow faster when the stock price declines. Assuming the company is a solid profitable one, and prices decline because of other, external, factors (think: general market sell-off, for example), then a decline in price benefits us emormously. However, this benefit is ours only if we have the foresight and fortitude to hold, not sell, and have dividends reinvested.
When is Cash Not Cash?
Yes, in the previous paragraph I have conflated cash with dividend reinvestment. A case can be made that they are not the same. Cash is usually considered to be what we get deposited into our bank account, and dividend reinvestment means we get an increase in our holdings but nothing to our bank account. In truth, I could spend the cash in my bank account, but dividend reinvestment means while my holdings increase, my bank account remains as is. If I need or desire cash in the bank account, then dividend reinvestment may seem a poor substitute. But my increase holdings means my assets increase as does my net worth, which is of more interest to me these days. And I can always turn off dividend reinvestment as needed.
And for you, cash or reinvest? Let me know here.
The illustration of Heath hens (Tympanuchus cupido cupido) is from “Illustrations of the American Ornithology of Alexander Wilson and Charles Lucian Bonaparte, Prince of Musignano, with the addition of Numerous Recently Discovered Species and Representations of The Whole Sylvae of North America ” published in 1835. Despite being very common from colonial times, the Heath hens went extinct in 1932. Illustration in Public Domain in the U.S. Courtesy Wikimedia Commons.
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