One key way to earn off of your investment is through company payouts called dividends.
There are two sorts of dividends, the first is cash dividends and the second is stock dividends. Both are valuable in their own ways depending on the situation.
What Are Dividends, Really?
Typically, companies pay dividends in cash, but companies may also pay in stock, too. These are considered rewards given to shareholders for their investment in the company. It is a fraction of the value of a share in a company’s stock.
The Downside to Dividends
The bad news with dividends is that they are not promised quarterly to shareholders. Dividends usually are distributed based on the company’s net profits.
While most of the company earnings are kept for future business activities such as mergers and acquisitions, the rest of the money may be distributed as dividends to shareholders. If the company is doing poorly, then the chances of getting a dividend payout are far lower.
However, some companies continue to give out dividends to maintain their record of making regular dividend payments.
What Can You Do with Dividends?
Cash dividends provide an obvious benefit in adding funds to your portfolio, which you may choose to grow further. However, stock dividends offer investors benefits in being able to grow their position in a company further and cash out at any time.
Investors could make a case for why stock dividends are arguably better than cash dividends. Stock dividends have longer-term benefits while cash dividends only provide an investor with immediate liquefied funds.
The potential for long-term profitability is higher with stock dividends than with cash dividends. Cash dividend payouts are not as likely to grow as quickly as stock dividends when it comes to market value, especially over a long period of time.
Making a Decision to Reinvest
Have you considered reinvesting your dividends to further your stock positions? There is a lot of long-term opportunities should you reinvest dividends in your portfolio.
So, when should you reinvest dividends? If the stock dividend payouts are coming from value stocks or growth stocks, then there might be a good reason to reinvest those dividends instead of liquefying them.
Value Stock and Growth Stock Reinvestment
Value stocks and growth stocks focus on long-term growth in stock prices. If there is a strong chance that the stock price is going to rise, then investors have an incentive to strengthen their position in that company. Investors may see dividend reinvestment in long-term growth companies as an opportunity to grow the market value of their assets.
Just remember that markets are volatile, so reinvesting may not be the best move depending on the market tide. There is a chance of losing money in the event of an economic downturn, which could happen at any time.
Get Professional Advice on Investing Your Dividends
There is also a good chance if you are new to the markets that you would not want to deal with all the complexities of trading and investing.
Contact us at Mooney Lyons to get help sorting through the benefits of reinvesting your dividends in new companies as well as old ones. Our financial advisors can help you come up with an investment plan and manage your portfolio, too.
The payments of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
All investing involves risk including loss or principal. No strategy assures success or protects against loss.