We all love receiving dividends and the common advice in regards to dividends is to reinvest them.
Why? Reinvesting these dividends allows an investor to super-charge future returns, using the power of compound interest. It’s a pretty great strategy. It is cheap, easy, flexible and increase stock market returns substantially.
That being said, I actually don’t reinvest my dividends and take the cash! I believe that there are pros and cons to each investment strategy, and it is all about choosing what works best for your financial goals. As my opinion on not reinvesting dividends is a more unpopular one, I wanted to share my rationale behind the decision.
Control of my money is important to me which is also a reason why I don’t contribute extra to my super retirement fund – I like having access to my money, when I need it.
I used to previously reinvest all of my dividends but as my dividends start to get larger in value, I started to prefer controlling how each payment is spent, saved or invested. By taking the cash, I can always reinvest them manually myself if I choose to and just have to pay for brokerage which is worth the liquidity to me.
This is why it’s important to make decisions that suit your personal goals rather than following others. Many investors don’t need the extra cash-flow and are happy to be illiquid in return for the many benefits that dividend reinvest brings. As always, do what works for you.
Saved by a dividend
In January, I experienced some major car issues and was left with a pretty large bill. It was completely unexpected and not budgeted for. I also was not going to get my salary for a while so I was struggling cash-flow wise. Luckily, I got my dividend that day which helped cover the entire expense.
Getting a dividend in cash meant I could use the money for car expenses versus dipping into my emergency fund and having to build that back up. My emergency fund will always be a priority over investing so it was great to allocate that money to what was important to me rather than it being automatically reinvested.
I’m a big planner, especially with my finances.
I like to have a strategy behind putting X amount of $ into a certain investment rather than it just being reinvested with no thought.
- What is the purpose of me buying this investment?
- How long would I want to hold it for?
- What % of my total portfolio should this investment be?
These are all questions I like to ask myself before making an investment decision. Having the dividends in cash allows you to carefully use the funds based on your financial plan rather than it getting mindlessly reinvested. Don’t get me wrong. Mindlessly investing is a great strategy that works for many people, however I prefer being more hands-on with my finances.
I’m big on diversification and if I reinvested all my dividends, one particular fund would be too overweight in my portfolio which wouldn’t suit my financial goals long-term.
Developing a passive income stream
One of my key long-term financial goals is to develop a passive income stream. My objective is to build this as soon as possible, and have my expenses covered by investment revenue, rather than a salary at work. By taking my dividends in cash, I am slowly working to build this and can retire early without potentially touching my capital. Too ambitious? Maybe.
My current passive income stream is small, but it currently covers all of my following bills:
- Electricity bill
- Internet/wifi bill
- Mobile phone bill
- Spotify subscription
- Water bill
- Car insurance
The wonderful part about this is that I don’t need to wait to live off passive income one day, I am already doing it now!
I see many investors who work on being frugal while they are younger, reinvesting all their dividends and then being financially independent in their 40s and beyond. However, I have a different outlook. I believe that life is simply too short – I am happy to start enjoying some of my passive income, now.
So, what do I usually do with my dividends?
It depends on the situation, I do something different every time!
Like I mentioned earlier, sometimes they help out with large expenses that come up such as car issues, insurance or dental costs. Sometimes, I will put them back into my investment portfolio – not always back into the fund that distributed them but also to buy different stocks that I had my eye on. It can also be completely random, like diamond earrings. Yup, I spent one of my dividends to buy diamond earrings at a police auction. Hey, we can’t all be financially perfect!
Dividends are not my focus
Another point that I would like to bring up is that at this stage, I do not focus on dividends.
This means that I don’t look at the dividend return when buying a stock and it’s not the most important factor to me, either. Rather, I see it as an awesome bonus. As I am still in my 20s, I focus more on capital gains. I focus on purchasing assets that will grow over time so I can make money through capital gains versus dividend yields as I believe this will be more profitable in the long-term. As I get older and closer to financial independence, I will certainly focus more and more on cash-creating investments.
That’s all from me! I’d love to know from you, do you prefer to reinvest or take the cash? What is your reason for doing so? Leave a comment below or send me an email on firstname.lastname@example.org!