An important yet sometimes overlooked aspect of investing in the stock market or other investment markets is the payment of dividends by the investment. Many people who invest only part-time or have investment plans through their workplace may not even be aware that dividends exist; they may even be confused by the sudden payment of dividends that appears periodically.
For those individuals who aren’t sure what dividends are or what you should do with dividend payments, this guide is for you.
Below you’ll find some basic information on what dividends are, as well as ideas of when you should reinvest your dividends and when you shouldn’t.
Defining Dividends
At its most simple, a dividend is an additional amount that an investor receives when the stocks or bonds that they are invested in perform well enough so as to give a profit to the company that they are issued from.
Many companies pay dividends based upon a portion of their profits, which is that portion divided up among all of those who have invested in it as a way to thank their investors for having faith in them and to share their profits with those who help them to stay in business.
Dividends are paid per share, so the more shares of a particular stock that you have the more you’ll receive when dividends are paid usually quarterly, as that’s when business report their earnings and profits or losses.
Some dividends are also paid on certain bonds or other investments that are done through a money market account; these dividends are a form of interest for the investment. In most cases, dividends are paid into a money market account so that you can choose to reinvest or withdraw them per your prerogative.
Some investments automatically reinvest all dividends paid, however, and many investment firms give you the option of having all of your dividends reinvested automatically into the stock or investment that paid them.
Reinvesting Dividends
Reinvesting dividends is an easy way to make more money off of a particular stock or investment after all, the investment is doing well enough to be paying dividends, and the reinvestment means that you have more of the stock or investment than you did before.
If the dividends that you receive are paid to a money market account, you may also choose to reinvest them into other stocks or investments than the one that originally paid them this can be especially useful if you are receiving dividends from one of your investments that you have a lot of shares in, but you have another investment that you don’t have much of.
You can use the dividend from the larger investment to slowly build up the smaller one, or you can split the dividends among several different investments so as to build them all up over time.
When Not to Reinvest Dividends
Sometimes, however, it’s just as wise to not reinvest your dividends. This is especially true when you’re holding a balance in your money market account to take advantage of a high interest rate that’s being paid to it, or when you’re receiving dividends from short-term investments that you’re going to cash out soon anyway.
Even if you decide not to reinvest your dividends, they are still an advantage of investing in certain companies or certain types of investments.
Remember to check and see whether your investments pay dividends and to investigate the options available to you in regards to reinvesting or gaining interest off of any dividends that are paid from your investments.
You may freely reprint this article provided the following author’s biography (including the live URL link) remains intact:
About The Author
John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the http://www.directonlineloans.co.uk website.
Tags: bonds, dividends, investment, reinvestment, stocks
The bond market always seems so confusing
to almost everyone. It does look to be upside down.
Why is it so?
When an investor buys a bond that matures
in 20 years he plunks down his cash, say $10,000,
and each quarter (or annually or as agreed) the
bond issuer sends him a check for the interest.
If it was 6% the bond holder will receive $600
annually until the twentieth year when the bond
issuer returns his $10,000. Very simple.
But suppose the bond owner suddenly has a
need for cash and must sell the bond. The bond
issuer is not required to take back the bond
until the 20th year. The investor must find
someone to buy that bond now. Of course, the
new owner will then receive the interest
checks. The bond is still worth $10,000 at
maturity so it should bring $10,000 on the open
market. Or will it?
Not necessarily.
If the interest rate market has fallen to
3% for this type of bond then it should sell for
an amount that will yield $600 on an amount of
money at 3%. Now that bond is worth $20,000
($600/.03X100). Conversely, if the interest
rates have increased to 9% the amount received
from the premature sale of the bond will fall
to $666 ($600/.09X100). The bond holder gets
less for the bond than the face amount, but the
new owner will receive the full amount at
maturity. The amount received from the sale is
directly related to the current yield for bonds
of the same quality.
As the interest (yield) goes up the principal
amount the bond holder can realize from the
sale of the bond goes down. As the yield drops
the bond can be sold for more than the face
amount, but will still bring the face amount at
maturity. The amount of time to maturity is not
being considered; however, the closer to
maturity the more value the bond will have.
When an investor buys a bond he wants two
things: safety of principal and return on his
investment (ROI). There is no consideration for
appreciation of capital. There are many types
of bonds and they are rated in term of safety.
The number one safety is the U.S. Treasury
Bond. It is where almost every foreign
government invests its money even beyond their
own government securities. There are various
rating agencies with the best known being
Moody’s.
Bonds are rated from AAA to junk with the
latter being speculative with the chance they
could default meaning you lose your money. Even
better graded bonds such as municipals are
questionable, but these and other bonds can be
bought with insurance to guarantee you will get
your money back.
Most financial advisors recommend that
portfolios contain a higher percentage of bonds
as people get older. That is for the investor
to decide.
Each person must determine risk versus
guaranteed return.
Al Thomas’ book,
“If It Doesn’t Go Up, Don’t Buy It!”
has helped thousands of people make
money and keep their profits with his simple
2-step method. Read the first chapter at
http://www.mutualfundmagic.com and discover why
he’s the man that Wall Street does not want you
to know. Copyright 2006 All rights reserved.