Does it matter? Well, sometimes…
If I bought stock in order to sell it at some later time, then wouldn’t I prefer the price to go up?
The answer is unequivocally ‘Yes!’
But, we ask. What if my goal is not selling, at least no plan to do so anytime in the foreseeable future, then what?
But, you say, how and why would anyone buy stock without the obvious goal of selling to make a profit?
Well, we answer, the goal here is for income, to accumulate dividends. In order to get dividends one must own stock.
The Fact
The simple fact is that dividends only come when we own stock. If we sell the stock, for any reason, dividends cease. Only owners of stock get dividends.
So it depends on what your goal is. If your goal is to make a profit by selling, then sell. If you goal is, as in our case, to receive dividend income, then don’t sell.
The Way of The Fact
There are two main ways of receiving dividends. I could just receive the dividends as cash, or I can reinvest my dividends.
My preference is, in most cases, to reinvest my dividends. This is how my stock ownership and dividends both increase automatically whenever dividends are issued.
Some people get the cash for their own use, or to buy additional stock.
Up and Down
Reinvestment of dividends is similar to automating one’s investments. Whenever dividends are issued, usually quarterly, the dividend amount is automatically used to purchase additional shares and/or parts of a share.
This purchasing occurs regardless of the then current stock price. Therefore, it is similar to automated monthly deductions to buy stock. While dollar cost averaging involves a monthly investment of the same amount, reinvesting dividends occurs when dividends are issued, usually quarterly.
One way to increase one’s stock holdings rapidly is to combine reinvesting dividends with dollar cost averaging. The simply means instructing one’s stock account to reinvest dividends, and also to set up dollar cost averaging. I have done this on various stocks over the years, and it is very gratifying to see one’s holdings increase swiftly.
Up, Down
While increasing the number of shares through dividends reinvest and-or dollar cost averaging, we remind ourselves that the price of stocks fluctuate at every turn. Sometimes prices are up, sometimes prices are down. With reinvesting and dollar cost averaging, we continue without attempting to time our purchases. I participate without regard to current prices.
If the prices gets so high as to be what I consider unsustainable, I will often pause dollar cost averaging. Overpaying is not something I am enthusiastic about. But the normal daily price fluctuations can and should, in my view, be ignored.
What He Said
“It will fluctuate,” said John Pierpont Morgan.
How Do I Know What to Do?
For better or worse, no one can predict with absolute certainty what will happen. Sometimes I may plan “If stock X goes below $Y, then I will buy more.” But maybe the stock will never dip that low. Or it does dip low, and I buy, and it continues to decline. Some stock dividends may not grow as I would like, or hard economic times may mean a dividend cut or elimination. The world is full of unknowns.
So, as a result, I make more than one bet, namely I diversify. I expect the economy to do well enough, despite its volatility. I pay my taxes, and I grumble about inflation. I eat when hungry and sleep when tired. I try not to fret about things outside of my control.
How do you react to uncertainty? Let me know here.
“L’Homme et son désir” is a 1917 hand-made book by Paul Claudel, and is an instruction book for a ballet written while in Brazil. Courtesy Lilly Library at Indiana University, Bloomington, Indiana.
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