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== Reinvesting Dividends - Why You Should == | == Reinvesting Dividends - Why You Should == | ||
| + | First of all, I am going to briefly describe what dividends are. Dividends are simply payments made to stockholders on a per share basis. Usually dividends are paid in cash but occasionally a company may issue a stock dividend (you would be given more shares of stock usually based as a percentage). Some companies issue dividends on a per year basis while the majority of companies issue dividends quarterly. Now that you know more about what a dividend is, let's take a look at why it is so important to reinvest them. | ||
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| + | Let me give you an example: $5,000 invested in Altria (MO) at the beginning of 1976 would be worth about 1.4 million today with all dividends reinvested. Now if you take the same $5,000 investment from 1976 but do not reinvest dividends, the total value today is only $375,000, over a 1 million dollar difference by not reinvesting dividends. Furthermore, the difference is not because Altria has paid you over a million dollars in dividends over 30 years. What happens when you reinvest your dividends is that you gain more shares of stock allowing you to compound the return of your original dividends. Not only do you gain extra value when the shares go up, you also will be earning dividends off previous dividends that have been reinvested into stock. Over time as the stock price fluctuates, you will be gaining more shares when the price is low, and fewer shares when the price is high. In effect, you are dollar cost averaging with your reinvested dividends. | ||
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| + | Most companies that pay dividends have DRIP (dividend reinvestment) plans. These plans allow you to sign up to have your dividends automatically reinvested in more shares of stock. In addition, most of these plans are offered as a free service to shareholders and they will purchase fractional shares. Of course, if a company does not have a DRIP plan it might not be practical for you to reinvest dividends if you have to pay a commission each time. In most cases, you are still required to pay taxes on dividends even if you don't receive them as cash. Check with your tax professional and plan accordingly for taxes on the dividends. Finally, dividend reinvesting works best when you are investing for the long term. This allows more time for your investment to compound. If you are looking at a shorter term outlook, dividend reinvestment may not be for you. | ||
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== External Links == | == External Links == | ||
Latest revision as of 22:08, 26 January 2008
Alan Reisch
Alan Reisch earned a degree in finance from Montana State University. After graduation he worked in the securities industry as a financial advisor/register representative. Later he purchased a commercial lighting and service company that he owned and operated for over 5 years. During these five years he was able to triple the annual sales of the company. Recently he founded 1Stock1, a free investment information website, and HB Shells & Sea, a company that specializes in handmade sea shell jewelry and crafts.
Historical Stock Returns - Are They Valuable?
Almost all of us have heard the stories of how much money could have been made by investing in a certain stock 10, 20, or even 30 years ago. Walmart (WMT), Microsoft (MSFT), Amgen (AMGN), and Altria (MO) are all great examples of stocks that have made their shareholders a lot of money over the past several decades. Well, if you are like most people, you are thinking, "That's great, I wish I would have invested in those stocks back then, but how does this help me now?" The answer depends on how you perceive and think about the information.
One way to respond is with the glass is half empty attitude, "I can't believe how unlucky I am, I always miss out on the big winners." If you truly believe that, you are not unlucky, but rather creating a self-fulfilling prophecy through negative thinking. The fact is, you probably did miss the boat on the previous mentioned stocks, but new opportunities always exist, finding them is the tricky part.
Which brings me to the other way to respond to the missed opportunity: Evaluate the history of the missed stock opportunity and discover ways to use that information to create a new opportunity. Every stock has a history, and while it can't predict the future, historical stock prices and returns can be used as another tool to increase the odds of finding a good trade. For example, let's look at two stocks: The first stock has earned better than 10% in 12 of the last 15 years while the other stock has earned over 20% in 8 of the last 15 years, but lost over 10% in 5 of the other years. Which stock do you think is more likely to earn over 10% the next few years? While you may earn a higher return with the second stock, the likelihood of loss is also much greater. Investments with a higher potential return also have a higher potential loss. It is called the risk/reward tradeoff. Also, keep in mind, when dealing with individual stocks, volatility and risk of loss is much higher than when dealing with a well diversified portfolio.
So the next time you learn about the great stock you missed out on, see what you can learn from its history and find another great stock to invest in on your own. Not only can it be rewarding financially, but it can be even more rewarding personally.
Investing in Stocks: Turn $5,000 into $1,000,000
First of all, I want to point out the long term historical return of the stock market is a little bit higher than 10% per year. Very few long term investments can make this claim. Some would argue that real estate is a better investment, and it may be in some instances, but I would rather put my money in investments that require no maintenance, renters, property taxes, or other "drawbacks" as I would refer to them. Of course, your own house, that you live in, is another story.
Now you are probably thinking, "That is great and everything, but how does this help me with making a million dollars in the stock market?" I am glad you asked. One of the most important lessons about investing in stocks that anyone can give you is patience. If you think you are going to make a fortune in the stock market overnight or even in a couple years, then I wish you good luck, but unfortunately you are more likely to lose money than gain money by trying to beat the market. However, if you are willing to find some good companies to invest in and are patient, you are very likely to earn a nice return in the stock market. In fact, even stocks that have performed very poorly, can earn you some decent money off your investment as demonstrated by the Stock Performance Guide at the 1stock1 website.
Another very important investment lesson is time in the market. Over time most established companies continue to grow and, as a result, their stock price also grows. In the short term, stocks can be very volatile and their prices can go up and down daily. However, as you extend your time frame, a solid stock performs in a much more predictable manner. This doesn't mean your investment will always make money, but time does put the odds in your favor.
The third lesson I will give you about stock investing is discipline. Determine why you are investing and what you want to accomplish through investing. Once you decide your reasons for investing, come up with a plan and stick to it. Don't allow yourself to get lured into the next "sure thing" in the stock market. For every one that works out, several more will fail. If it was a sure thing, investors would know this and bid the stock price up accordingly. If you know information that the rest of the stock market doesn't, then your looking at insider trading charges. It is very easy to be tempted to earn the "quick buck" and much more difficult to be disciplined with an investment plan. As expected, the road that requires the most work yields the best results.
Finally, I would like to stress the importance of diversification. Probably the biggest mistake you can make in investing is putting all your money in one stock. This strategy is not only risky, but also less likely to earn as a high of return as a diversified portfolio. Having your money invested in several stocks helps minimize the risk while still increasing overall return.
Reinvesting Dividends - Why You Should
First of all, I am going to briefly describe what dividends are. Dividends are simply payments made to stockholders on a per share basis. Usually dividends are paid in cash but occasionally a company may issue a stock dividend (you would be given more shares of stock usually based as a percentage). Some companies issue dividends on a per year basis while the majority of companies issue dividends quarterly. Now that you know more about what a dividend is, let's take a look at why it is so important to reinvest them.
Let me give you an example: $5,000 invested in Altria (MO) at the beginning of 1976 would be worth about 1.4 million today with all dividends reinvested. Now if you take the same $5,000 investment from 1976 but do not reinvest dividends, the total value today is only $375,000, over a 1 million dollar difference by not reinvesting dividends. Furthermore, the difference is not because Altria has paid you over a million dollars in dividends over 30 years. What happens when you reinvest your dividends is that you gain more shares of stock allowing you to compound the return of your original dividends. Not only do you gain extra value when the shares go up, you also will be earning dividends off previous dividends that have been reinvested into stock. Over time as the stock price fluctuates, you will be gaining more shares when the price is low, and fewer shares when the price is high. In effect, you are dollar cost averaging with your reinvested dividends.
Most companies that pay dividends have DRIP (dividend reinvestment) plans. These plans allow you to sign up to have your dividends automatically reinvested in more shares of stock. In addition, most of these plans are offered as a free service to shareholders and they will purchase fractional shares. Of course, if a company does not have a DRIP plan it might not be practical for you to reinvest dividends if you have to pay a commission each time. In most cases, you are still required to pay taxes on dividends even if you don't receive them as cash. Check with your tax professional and plan accordingly for taxes on the dividends. Finally, dividend reinvesting works best when you are investing for the long term. This allows more time for your investment to compound. If you are looking at a shorter term outlook, dividend reinvestment may not be for you.
External Links
Personal URL: http://www.hbshellsandsea.com
Name: Alan Reisch
Country: US
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