Should I reinvest the dividends that I receive from shares? Should I take cash? What are the pros and cons of reinvesting dividends? What if I am a retiree?
Share dividends provide returns to investors other than the increase in share prices. Reinvesting your dividends increases your number of shares owned in a dividend-paying stock. Reinvesting allows you to grow your investment at a compounding rate.
RM100k invested with 5% dividends withdrawn every year after 30 years: RM150k cash dividends
RM100k invested with 5% dividends reinvested every year after 30 years: RM332k dividends after compounding OR RM514k including stock growth at 5%!
You can reinvest your dividends in 2 ways:-
- Reinvesting back into the stock (when the option is available by purchasing more units).
- Receiving cash dividends and then buying more of the same stock.
However, reinvesting your dividends may not always be the right move and is a question every investor will need to seriously consider.
Dividend Reinvesting Pros
- Returns from your dividends reinvested add up over time with compounding interest and stock growth.
- Reinvesting dividends at times when prices are low, such as during a market crash/downturn, allows you to recover faster from the crash/downturn.
- You do not have to time your various market entries for your dividend reinvestment buying more when the price is low (and vice versa).
- You make sure you use your funds instead of holding it in cash and losing out on opportunity and time costs.
- You can save on fees and expenses (often no fees or minimal charges) when opting to reinvest your stock dividends.
Dividend Reinvesting Cons
- You may end up buying stock when the price is high when reinvesting your dividends.
- You end up buying more of a company which you may not want to hold for a long-term, i.e. unsure of the stock’s future.
- You end up reinvesting the cash that you could have held or used to make a better/different investment with higher returns.
- You may end up with your portfolio being out of balance from your asset allocation and portfolio strategy.
- You may end up with odd lots in stock which are more difficult and expensive to trade.
For retirees, consider looking at how your dividend returns provide cash flow for your living expenses in your golden years. It does not make sense to reinvest dividends if at the same time you are regularly selling off stocks after you reinvest the dividends. This will incur you unnecessary costs in time and money. Dividends in your golden years can give a good income stream over the long-term.
If you are investing for the long-term and confident in the long-term prospects of the company, it would generally be recommended to reinvest your dividends in the stock.
If you want to increase your cash holdings OR you have a better stock/investment choice(s) to invest in, then you may want to take cash dividends.
If you’re retired, most retirees will likely want to take the dividend income for your retirement years by utilizing the cash flow generated.
The advice on dividend reinvesting may apply as well in cases of stock splits.