I have been investing in some dividend stocks mainly because saving account rates these days are pathetic. For an emergency fund, earning a percent or two on my investment is fine. But for long-term, it’s lousy.
If you don’t really have an immediate need of the money earned through dividends, it’s advisable to reinvest the amount. And you don’t have to bother about reinvesting process as many broking companies these days offer such service for free.
But simply reinvesting your dividend because I suggested isn’t a good idea. You must know why you are reinvesting. A very simple and convincing reason is you get additional stocks at no cost, something like bonus stocks. This is assuming that your broker offers such free service. And the money you earn through dividends must be used to buy stocks that provide higher dividends to avail more free stocks in the future.
This income, however, is taxable. Hence, if you decide to reinvest, make sure that you account for the tax as the entire amount will be reinvested. For instance, I own ‘X’ shares of Apple (AAPL) and receive a diminutive dividend of $0.16 per share every quarter. So, if I own 100 shares, I would receive $16. However, I wouldn’t reinvent the whole $16, as I would be charged 15% or $2.4 tax on the earned income. So, it’s advisable to set aside this $2.4 for taxes and reinvest the leftover income.
There is ample information on this subject and you will find many such examples with figures and comparison. For first time investors, this may seem to be a magic trick as they just found a way to get more stocks without pulling out extra dollars from their pockets. However, investment as ever is never 100% safe.
While you may earn a huge income through dividends and buy more stocks through reinvesting when the market surges, there is always a risk of losing all the extra income if the market collapses. But over the long run, as experts say, you are more likely to earn than lose. However, I know a few names whose stock price fell to $0 and many wound up their business. So, a little and regular research is always safe.
But overall, dividend reinvesting is a good way to gradually increase the number of stocks in your portfolio. It isn’t a magic though.