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Harness The Power Of Dividends
If you invest in stocks, you probably love the thrill of buying an undervalued gem that rises 50% in a few months -- or that triples over two years. Who doesn't? It's a great feeling. But it doesn't happen every day. And counting on a big score is no substitute for a well-constructed, diversified portfolio that builds wealth over time.
For most investors, the foundation of a long-term portfolio is a mix of large-, mid- and small-cap stocks that includes some dependable income payers. Dividend-paying stocks tend to be less volatile, and the income they generate provides ballast to a portfolio that also includes more aggressive offerings.
But in addition to those benefits, most dividend payers allow investors to generate wealth over time through an underrated strategy that couldn't be simpler: using dividends to buy more shares by automatically reinvesting them.
Dividend reinvestment is a common practice in retirement plans for investors under 59?. That's because it allows for no-decision buy-and-hold investing in a portfolio that doesn't allow withdrawals anyway. (Outside a retirement portfolio, it's not a bad choice either -- just remember that you'll have to pay taxes on the dividend amounts, so you'll need to use cash from elsewhere to do so.)
To see why dividend reinvestment is so powerful, consider this example: You buy 100 shares of a $100 stock for $10,000. The stock pays an annual dividend of $5 per share, for a 5% yield at purchase. You reinvest all dividends into purchases of new shares. (For the sake of this example, let's say the share price and dividend don't change, the dividend is paid only once a year, and we won't include commissions or fees.)
