Reinvesting Dividends for Long-Term Gain

Here are the basics of reinvesting dividends for long-term gain.

How it Works

Reinvesting dividends is a fairly simple process once you get the basics. You start out by purchasing shares of a dividend stock. This type of stock is just like any other shares of stock except that the company pays out a dividend regularly. They could pay out a dividend once a month, once a quarter or annually. A dividend is just part of the profit that a company made during a given period. Dividends are not required of corporations, but many pay them as signs of strength. They want to make their investors feel positive about the prospect of investing with them.

Some people simply keep the dividends and use them as a source of residual income. While there is nothing wrong with this, you may find that reinvesting them is a better long-term strategy. When you get the dividends, you can use the money to buy additional shares of stock immediately. 

Benefits of This Method

With this type of investment strategy, your portfolio will start to grow. Dividends are something that can come regardless of the price of the stock. Therefore, if you own enough stock, the amount of money that you get from dividends can be significant. Once you have already paid for the stock shares, this is basically like getting free money to invest. 

If you use the money to reinvest, you are gaining shares of stock as you go. As long as you are investing in a sound company that will be around for the long term, the stock prices will continue to grow. Since this is a long-term method, it does not really matter what the stock price is as you go. You are mainly concerned about getting the dividend payment and just buying more shares. The more shares that you buy with the dividend payments, the bigger your future dividend payments will be. Therefore, every time you get a dividend payment, you will be able to buy more and more shares. 

Tax Considerations

Before you undertake this method, you will want to make sure that you understand its tax implications. When you get paid dividends, you are going to have to pay taxes on them. When you use the money to reinvest in the stock, you will not have any of it available for tax payments. Therefore, you will have to plan on covering your taxes on the dividends with some other source of income in order for this method to work. 

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