Assess Changing Dividend Payments - Stock Investing Decision Making

There are strategies available for dividend stock investing that provide value to an investor and helps to grow their investment portfolio. Investing in companies that pay high and consistent dividends is the mark of a value investor.  Using dividends as a way to increase your portfolio’s value is one way to use that value to your benefit.

Receiving Dividends
Many investors receive dividends in the form of cash when declared by a company. The company will issue a check for the amount of the declared dividend for which the investor will receive a tax statement at the end of the year and report the dividend as income. This reporting occurs whether the dividend is received or not.

Using Dividends to Purchase Shares
Another way to use a dividend is through reinvestment of the proceeds to purchase additional shares of stock. This designation, which is available with most every stock brokerage account, allows the company to use the dividends to purchase any whole or fractional amount of the company’s stock and increase the client’s portfolio value.  Over time, a program of dividend reinvestment can mean more shares of the company to receive dividends on.

Dividend Reinvestment Plans (DRIPs)

Investment clubs and small investors that do not have a lot of money to invest can use what is known as a dividend reinvestment plan, or DRIP, as a way to purchase shares of company’s stock. With a drip, the investor buys a small number of shares initially. As the company pays dividends, the plan automatically reinvests them to purchase additional shares. This process continues constantly as the account of the investor grows with the additional shares being purchased.

A DRIP, or other use of dividends, to purchase shares can be easy to establish. It is done simply by making a designation on the customer new account form to have dividends reinvested. Although the dividends will be reported as income in the year in which it was received, they are better used inside your portfolio then received as cash.

Deciding to Reinvest Dividends
The decision to reinvest dividends to purchase additional shares of stock or take the dividend as cash depends on your need for the dividend. If there is no need,  the willingness to defer receipt and use the dividend to increase your portfolio’s worth is a good option. The choice is different for every investor and should be an individual consideration. It is possible to take receipt of the dividend in a given year and designate them for reinvestment in the following one.

blog comments powered by Disqus