The Dividend Guy Investment Process Part 10: Reinvesting Dividends

Written by The Dividend Guy on January 26, 2008

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Wow, we are getting to the end in series of posts titled, The Dividend Guy Investment Process. Today’s post is going to talk about something that I am very passionate about - reinvesting dividends!

When an investor receives dividends from a dividend stock, they have two choices. The first is to take the dividends as cash and accumulate them in a brokerage account as cash for to be withdrawn at a later date. The second option is to immediately take those dividend payments and use them to purchase more stocks, either in the same company or into another company. My choice is to take the dividend payments and reinvest them into more shares of the same company. This makes it easy and since I use the CSA, it happens for me automatically.

My rationale for reinvesting my dividends is best described in an article I came across on the AIC website (pdf). The image below explains it all - from 1982 the TSX index returned 863% without reinvesting dividends and 1,705% with dividends reinvested. That equates to a lot of additional value created because of the reinvestment of dividends.

Power of Reinvested DividendsClick to Enlarge

The next post in the series will be the last and will show my portfolio makeup and review I do on a monthly basis.


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5 Comments so far

  1. I January 28, 2008 1:19 pm

    Hi: I am new to purchasing dividend paying stocks. I have looked into your link to CSA. Other than reinvesting your dividend payments, why else do you use CSA. Don’t you feel limited by only being able to invest in the pre-screened securities offered vs other online brokerages which allow a greater selection?

    Thank you for your feedback.

    Your blog helps out a great deal.

  2. The Dividend Guy January 28, 2008 11:34 pm

    I do feel limited at times. I am in the process of opening an eTrade account for other stocks/etfs I am looking at. Overall though, the CSA provides a lot of the good dividend growth stocks - JNJ, KO, PEP, RY. I have not found much need to this point, but perhaps will in the future, hence the eTrade account. Trouble with the other brokerages is they don’t do reinvestment into fractional shares. That is a big deal for me.

    Thanks for the comment.

    TDG

  3. Matthew Aaron Sumpter January 30, 2008 9:28 am

    I have avoided reinvesting my dividends for one reason, but I don’t even know if it is valid. I have had a ShareBuilder account for several years and I also have a Scottrade IRA account. My hesitation was due to possible tax ramifications. I have not sold any stocks, so I have not had to deal with it yet.

    If I reinvest my dividends, when I sell the stock, do I have to list each purchase on my tax return. If I have a stock that pays dividends every quarter, then I also make a purchase of that stock every quarter if I’m reinvesting dividends. So when I sell, am I going to have to document 4 purchases for each year I owned that stock? I have 25-30 stocks and many pay dividends, so this seems like it could be tedious.

    Right now, I just let the money roll into my money market account and when that accumulates enough, I make one larger purchase. Let me know what you think.

  4. Slackerwealth February 2, 2008 3:25 pm

    Hi, in response to a comment you wrote, “I am in the process of opening an eTrade account for other stocks/etfs I am looking at.”

    I’m sure you’re aware that ETrade has some problems right now with liquidity. Since you’re opening an account, however, I don’t think you know the extent of those problems.

    I know a few people who have money in their ETrade accounts and are unable to take it out. ETrade does not let them. Withdrawl requests are met either with complete unresponsiveness or excuses. Perhaps these are isolated cases, but do be careful.

  5. TAMMY MACDONALD February 19, 2008 7:57 pm

    DEAR DIVIDEND GUY,

    I AM 36 YEARS OLD CANADIAN CITIZEN, LOOKING TO PLAN AHEAD FOR MY RETIREMENT AS BEST I CAN. I HAVE A VERY LIMITED UNDERSTANDING OF DIVIDEND STOCKS AND WHERE TO BEGIN TO LEARN. CAN YOU HELP…WHAT DO I NEED TO KNOW?

    I HAVE SOME MONEY COMING FROM THE SALE OF REVENUE PROPERTIES & WOULD LIKE TO INVEST IT WISELY!

    THANKS!

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