Amy Arnott of Morningstar wrote a really nice article (found here) about when to reinvest your dividends.
The thing I like about it, is she kept it rather simple. While there may be a fistful of other reasons for or against reinvesting dividends, there is something to be said for general principles or maxims that cut through the noise of too much information. We have all suffered the effects of too much data or information, i.e., inertia, analysis paralysis, or whatever you would like to call it - too much information causes us to do nothing.
So, when should you reinvest your dividends:
Plain and simple, you are in the asset accumulation phase of life (reason - dividends make up about 40% of the market’s returns since 1926)
When should you reconsider reinvesting your dividends:
You need the income to support your standard of living
You already have a sizable position in that asset or its current price is a little frothy
If you employ the above-simplified principles in a vacuum, will you be right 100% of the time? No. But, you will have hopefully given yourself a leg up when employing either of Daniel Kahneman’s (author of Thinking, Fast and Slow) “Systems 1 or 2.”
If you have questions about your particular retirement planning needs or your investment portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.
At Intelligent Investing, we believe in a consistent and disciplined, long-term investing approach.
David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM. He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton. Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar. For more information about Mr. Hogans and his firm please see his ADV filing with the Securities and Exchange Commission (SEC) .