One often hears that it makes sense to reinvest dividends in order to exploit the greatest possible return potential. In some cases, however, it can also make sense not to reinvest your dividends.
• Investors can earn profits with dividends regardless of the share price
• Thanks to reinvested dividends, investors can benefit from the compound interest effect
• But there are also good reasons not to reinvest your dividends
With a regular dividend, listed companies can create an incentive for investors to invest or keep them in shares in the company. For investors, the dividend has the advantage that you regularly receive a profit distribution regardless of the price movement of a share. Then there are two options: have the dividend paid out or it reinvested. Even if many financial experts recommend reinvesting dividends, this decision must be made individually.
Advantages of reinvested dividends
Of course, there are some points that speak for re -annihilation of the dividends: The process is automated in intelligent equity funds, no fees are due and by reinvesting the dividends you can take advantage of the compound interest effect. You buy from your profit distribution New sharesso you will receive a distribution of profits for this in the future and – even if the sum may not be particularly large, a significant amount can come about in the long run.
But there are also situations in which it can make more sense to have the money paid out.
Good reasons not to reinvest dividends
One reason to have your dividends paid out instead of rejecting them is that you need the money. After all, precaution is important and the highest possible return is desirable, but in this case the short -term income can have priority over the long -term growth target. Such a situation can be before or in retirement, for example. In this case, it may make sense to build up a cash pad or use the money to close a possibly existing pension gap. Otherwise it could happen that you may have to sell shares from your portfolio during your pension or at an unfavorable time to get money.
Another reason not to reinvest its dividends can be the portfolio composition. Due to the reinvestment of dividends, the number of shares held increases and the proportion of the position in your own portfolio increases. If this position performs well, this naturally has a positive effect on the overall portfolio, but poor performance can put a strain on the overall performance of the portfolio with overweight. In order to avoid too strong concentration, it can therefore make sense not to continue to reinvest your dividends in certain positions.
Even if the portfolio is to be further diversified, it may make sense not to reinvest your dividends, but to use it to build a new position or possibly even invest in other financial classes. For investors, for example, it can also make sense to reduce their risk over time by making their dividend distribution flow into less risky assets such as bonds. So the money is further invested – just not in the same stock or asset class.
Not a good reason for a payment
According to a consultant, according to the SmartAsset, there is no reason to be paid out his dividends just because the performance of the underlying stock leaves something to be desired, because that the company pays a dividend shows “a proven track record in the achievement of profits” and thus fundamentally it is worth investing in the company. For those who continue to hold on to a share, he therefore sees no reason not to continue the dividends – and the share price can recover at any time.
“I would like to remind my customers that we invest in companies, not in stocks. The share price is just an indicator of the value of a company and sometimes a very unreliable. This truth is often forgotten and is always important,” says the contribution.
Editor finance.net