One of the many great things about dividend reinvestment is that we are constantly investing, even if we do not add additional money to buy more shares.
What Do I Mean By That?
Let’s look at the standard investing experience of a person who buys stock with the hope to later sell it. This person buys some stock. At this point they are invested.
As long as they don’t sell, they remain invested.
If they receive a dividend during this time, the dividend cash is deposited into their brokerage account.
When they finally sell the shares, they are no longer invested.
Now let’s look at the experience of a person who reinvests their dividends.
This person buys some stock. At this point they are invested. But in this case they have specified to their broker to reinvest their dividends.
When they receive a dividend, their dividend is used to purchase additional shares.
As long as they do not sell their shares, they are purchasing additional shares with every dividend issued.
Without needing to change anything, they are constantly growing their dividend income and their assets by reinvesting their dividends.
By focusing on the long term, an investor who remains with dividend reinvestment can automatically grow their portfolio. Every dividend issued buys additional shares. This increases their share count as well as increases the dividend amount at the next dividend issue.
What To Know
First, it takes funds to get started, That is obvious.
Secondly, while it takes time to grow substantially from where one starts, we can liken it to the advice about planting a tree. Question: When is the best time to plant a tree? Answer: The best time was twenty years ago. The second best time is today.
This brings us to one of the unsaid benefits of dividend reinvestment: it forces one to focus on the long term. The famous line applies: Time in he market beats timing the market. Read about why this is so here and here.
Since we ae likely to make more money by staying in he market, it pays to reinvest. The longer we remain invested with dividend reinvestment, the more we gain with each dividend issued.
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