Archive for the ‘Investing’ Category.

Optimizing Dividend Returns: Reinvestment vs. Spending

Dividend income is considered one of the most popular and appealing forms of passive incomes, as it not only provides investors with steady passive income, it also does so while giving you potential for further capital appreciation. While neither stock appreciation nor the yield it provides is guaranteed, you have much better certainty with bigger and well established companies, including consistent dividend increases.

So what is the most popular dividend investment approach and which one should you go with? Let us go through them, exploring each in-depth and which one to choose depending on your financial goals and lifestyle etc.

Fully Reinvest (100% DRIP)

With this approach, you allow your bank or investment firm to reinvest all dividends automatically through a Dividend Reinvestment Plan (DRIP) based on your dividend payouts.

For example, let’s assume you own 100 shares of ‘ABC Bank’ stock, and it pays a $1 quarterly dividend (most companies pay dividends on a quarterly basis). This means you receive $100 in quarterly dividends. With a DRIP plan, assuming the stock price is $25 (for simplicity), you will receive an additional 4 shares, increasing your total holdings to 104 shares. There are several advantages to going full DRIP, as it helps with automating things which is crucial for wealth building. In other words, this approach allows investors to reinvest their dividends back into the same stock or fund, purchasing additional shares. Over time, this can lead to compound growth, as the reinvested dividends generate their own dividends. This compounding effect can significantly increase the overall return on investment in the long term. Furthermore, you are getting extra stocks without having to incur brokerage fees or commissions (depending on your bank or investment firm, this may be free to some anyway) .

Important to note that some banks also allow fractional shares so if your dividend payout is not enough for a full share, you get a fractional one.

Hybrid (DRIP where possible and save or spend the rest of the cash)

As mentioned earlier, not all banks or investment firms allow fractional shares. So if you don’t have enough dividend return to get a full share, the balance of that money is paid to you as cash, which you can either keep in your investment account for future purchases, or withdraw to spend it and do whatever else you want with the money. For example, the bank I use for my investments doesn’t have fractional shares. So if I get $50 in a quarterly dividend return for a stock that is priced at $40, I will automatically get one share (DRIP) and the other $10 will go back to my account. If fractional shares was an option at my bank, I would get 1.25 ($50 divided by $40) shares of that stock. This is the approach I have followed for the most part, given that my bank doesn’t have fractional share. This approach is ideal for those who want to see their investment grow, while also enjoying some of their returns at the same time. For example, a lot of time, the quarterly dividend for some stocks in my portfolio will be enough to buy 2 or more shares, and still have cash leftover which I use to either save for future stock purchases, or simply withdraw to spend it as I wish. Best of both worlds!

Fully spend and enjoy it

Of course, there is always the other extreme, where you spend all your dividend returns and not invest any of it. This is ideal for those who have already achieved their objective of financial independence or reached their goal of generating a certain amount of return per year. Even in this extreme case, you still need to watch your investment to ensure your capital is preserved and are only using the dividend returns.

As mentioned, for years , I was on the first option, but have lately made my way to the second and hybrid approach, given some lifestyle, family and economic changes etc. The goal is still to keep growing the portfolio until I reach a specific goal in mind for how much dividend returns I wish to achieve.

Deciding whether to reinvest your dividend returns or spend them entirely depends on various factors such as your age, lifestyle, and financial goals. On one hand, reinvesting dividends can be a sensible choice, especially for those looking to build wealth steadily over time. In fact, various studies confirm that if you invested in the S&P 500 or other stock markets and reinvested the dividends you received, your investment would have grown faster compared to just watching the stock values go up. Dividends play a significant role in how much your investment can grow over time. On the other hand, spending all dividend returns may be suitable for individuals who have already attained financial independence or have specific yearly return objectives in mind. However, even in this latter scenario, it’s crucial to maintain a vigilant eye on your investments to ensure your capital remains intact, with only the dividend returns being utilized.

Ultimately, the decision should align with your unique financial circumstances and objectives. Just don’t reach retirement age or even beyond, and still be stuck on option 1. The obvious question then becomes: you have spent decades building this cash machine, so if you still can’t enjoy it now, when will you?

How to get started with investing for beginners

In your journey to financial success and wealth accumulation, you will eventually come to realize that saving money alone is not enough. To take your money to the next level, you need to start investing. Investing is simply the act of putting your money into a business or asset for some time, in hopes of getting a bigger return in the future. While it is similar to keeping your money in a savings account, there are two major differences: the returns with investments are potentially bigger, but there is also risk involved, where you can make significantly more money than in a savings account, but could potentially lose money. With a savings account, while the returns may be smaller, your money is guaranteed and there is no risk of losing it.

If you want to take the next step towards financial independence and want to start investing, here are a few things to consider and keep in mind:

Decide on your goal from investing: is it to make more money? is it to diversify your sources of income? or is simply take you to the next step towards better wealth accumulation.

How much to invest : as a beginner, best to start with a smaller amount, until you feel more comfortable and have better understanding of how things work

Where to invest : another consideration is which bank or discount brokerage to use. There are various websites and tools online that compare various discount brokerages, and while transaction fees should be a priority to consider, there may be other factors to play when deciding on where to do your investments (and maybe trading)

What to invest in: last but not least, you need to consider the type of investments you will be purchasing. While stocks (also known as equities) are probably the first thing that comes to mind, there are other assets to think about such as REITs, ETFs, commodities, FOREX, Crypto, bonds, mutual funds and more.

It is safe to say, no billionaire – and most millionaires – would have reached their level of financial success, without some form of investment. Investment doesn’t have to be about stocks or mutual funds, and may include buying land, investing in a business, real estate etc. But as a beginner, and to get your feet wet, best to start with a small amount that you are comfortable with and one that you wouldn’t mind lose some or most, and buying into one or two stocks and mutual funds.

To invest or not to invest in Cryptocurrency: Is it time you considered Bitcoin and other digital currencies?

Cryptocurrency and Bitcoin have become increasingly popular investment options for investors in the last few years. While some see them as a high-risk gamble, others may see them differently, as a potential opportunity for significant returns. So, should you consider cryptocurrency and Bitcoin when investing or as a way of diversifying your investment?

First and foremost, it’s important to understand that investing in cryptocurrency and Bitcoin is a highly volatile and risky venture. The value of these assets can fluctuate wildly in a short amount of time, and there is no guarantee that you will see a return on your investments. It’s important to only invest money that you can afford to lose and to thoroughly research any cryptocurrency before investing. For example, while cryptocurrency is risky in general, there are some currencies that claim to be more stable and known than others. This is what is colloquially known as Stablecoins: these are cryptocurrencies that claim to be backed by fiat currencies—dollars, pounds etc.

That being said, some experts believe that cryptocurrency and Bitcoin can be a valuable addition to a diversified investment portfolio. Cryptocurrencies operate independently of central banks, meaning they are not subject to the same monetary policies and inflation risks as traditional currencies. Furthermore, Bitcoin is starting to get some adoption as a digital payment method, which could theoretically lead to increased demand and value over time. But so far, that has been slow to take off.

In conclusion, whether or not to consider cryptocurrency and Bitcoin when investing ultimately depends on your risk tolerance, investment goals and basically how much faith and trust you have this is or will be a viable investment option. If you’re willing to take on the potential risks and are comfortable with the volatility of these assets, they could be a good addition to a diversified portfolio. However, it’s essential to approach cryptocurrency investments with caution and to thoroughly research any potential investment opportunities. It is also important to note that, unlike all the hyperboles you may ready online from those who like to hype cryptocurrency, you are highly unlike to become a millionaire overnight from owning these digital currencies.