Ending a quarter or year in the black with excess earnings to spare is usually considered a success for a corporation, but it also indicates that there’s still decisions to make. How will its board of directors use those earnings? Will they reinvest into operations or pay down debt? Or will they choose to reward their shareholders with dividend payments? Those that choose to payout dividends leave their shareholders with some decisions to make as well.
First, what is dividend investing?
Dividends are payments made by a company to its investors on a per share basis. As its name indicates, dividend investing means purchasing stocks that pay dividends and using those payments to build an income stream on top of any growth in share value.
Investors pursuing this strategy may handpick a few dividend paying stocks or invest in an entire portfolio of them. They can also choose dividend focused exchange traded funds (ETFs) or mutual funds.
Any corporation that finds itself in a positive financial situation can choose to payout dividends to investors, however only 65 companies in the world, humbly known as the Dividend Aristocrats, have paid and increased regular dividends for more than 25 years. Typically companies aren’t required, nor do they have to keep up with regular dividend payments once they start. Real estate investments trusts (REITs) are an exception to this as they are required by law to payout 90% of their profits to shareholders.
The Shareholder’s Decision
When it comes to dividend payouts, the question on many investors’ minds is: “take the cash or reinvest?” Choosing to take a dividend payment as a check means you will have extra money to use as you see fit – invest it, spend it or save it. Dividends are one of the ways retirees may choose to supplement their retirement income.
However, investors considering a more long-term strategy might see a bigger benefit in reinvesting their dividends to buy more of the same stock. When you use your dividend to buy more shares, it can increase your dividends next time with which you can buy even more shares, essentially compounding the growth of your investment and resulting dividend. This strategy can be a great way to grow a nest egg over time.
The DRIP Option
Many dividend paying companies offer dividend reinvestment plans (DRIPs) to simplify the reinvestment process for shareholders. Through a DRIP plan, dividends are automatically reinvested on the shareholder’s behalf.
DRIP plans may offer several benefits including:
- Discounted share prices
- Transactions free of commissions and fees
- Ability to purchase fractions of shares (for example, if one share costs $20 and you only have $15 to reinvest, you will be able to own 75% of the share)
To Wrap Up
Dividend investing (and reinvesting) can prove to be a solid long-term strategy for those investors looking to build wealth and prepare for retirement. What a shareholder chooses to do with his or her dividends depends on their specific situation and income needs. If you’re interested in adding dividend paying corporate stocks or REITs into your investment strategy, talk to your financial advisor to create a plan that will serve your needs.
Modiv pays monthly dividends and offers a DRIP.
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The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.