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What must I do with my dividends?

by , 06 May 2016

I love receiving dividends but reinvesting dividends is not always the most cost effective way to invest it.

Let me explain...

When you only get paid out a couple of hundred or thousand rand in dividends, the brokerage costs of reinvesting that cash can eat away a large chunk of the money.

That's why some investors draw the cash and spend it. This isn't a wise move either.

So, today I'm going to show you how your dividends can save you costs...
Spending your dividends will cost you big time!
 
Consider this…
 
Let’s say you have a R200,000 portfolio growing at an average rate of 15% per year. And you receive and spend the 3.64% dividend each year. After 15 years, you’ll have received a substantial R398,397 in dividend pay-outs.
 
This huge figure clearly shows the attraction of dividends.
 
But what if you didn’t spend your dividends? Let’s assume you reinvested them.
 
In this situation, the dividends you reinvest begin to compound. And before you know it, your returns on your dividends become larger than you ever imagined.
 
How big? Well, without adding any extra money and just reinvesting your dividends, your R200,000 portfolio would have grown to R2,597,314 in just 15 years.

Had you withdrawn your dividends, your portfolio would be sitting on just R1,627,412.

But remember, there are still the brokerage costs I told you about earlier to contend with.
 
How to get the most out of your dividend payments
 
So let’s say your R200,000 portfolio pays you out R7,280 in dividends (3.64%). You want to reinvest your dividends. If you wanted to use this money to buy shares then you’d only have
R2,426 for each share. That means you’ll pay around R150 in brokerage on each transaction.
 
To break even, you’d need the shares you buy to rise by more than 6%.
 
Clearly, reinvesting in other shares isn’t the most efficient way to use your dividends
 
So, what should you do?
 
Combine your reinvestment with your portfolio reweighting because this will allow you to make few transactions and larger transactions. And that means you’ll be paying much less on brokerage fees.
 



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