Dividend Investments vs. Non Dividend Paying Investments

By: Mika Hamilton

When you have some kind of investment that pays dividends, or makes regular payments of some kind, you may wonder if that is the best way to go. Dividends usually come in more than one form, but it will usually either be cash sent to you, or a cash amount that is reinvested into buying more stock for you. With this in mind, here are some thoughts about why one may be much better than the other.

Companies that give stock may give you the option of which method you prefer. You decide whether you want the cash, or having your money reinvested into more shares of stock.

When you receive a dividend from stock, you will, in most cases, need to pay taxes on that amount - whether or not you actually receive any cash. So, this will largely rule out the tax angle in making your decision about which may be the better way to go.

Being given cash from stock, however, will have an effect on your stock. Since stock increases and decreases in value over time, stock is considered to be a worthwhile long-term investment. This is especially true when a company is successful and its stock increases in value.

Getting a percentage of your shares back every so often is actually a removing of a portion of your investment - if it comes to you in the form of cash. Unless you take that same amount and reinvest it into some form of interest bearing account, you are actually losing money that you could be consistently earning on.

If that dividend is reinvested into purchasing more stock, then this is by far the better choice. As your stock increases, you will actually be earning interest on your interest. This is compound interest, which is of far more value than you can earn in many institutions. Over time, this interest on interest could soon double the amount you have in that stock.

Do not let getting a dividend fool you, though. Just because a company pays a dividend does not mean that the company is actually doing well financially. You should consider selling that stock if you could find one with greater profitability somewhere else - and get even greater dividends for even more reinvestments.

If the stock value is good with that company, however, then you should stay with it. Consider the amount of your initial investment, the profit you have now, and if the stock is increasing in value, why not just stay with it? If it is good company, the stocks will gain in value if the economy permits it.

Watch out for the company that allows you to reinvest the dividends, but at a cost to you. While many companies do this, you may have the option to change it at any time simply by filling out a form and submitting it to the company. It may be easier and cheaper to see if the company will allow you to automatically reinvest any dividends because there may not be any charges for this service. This increases your overall value instead of reducing it with cash dividends.

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