Tag: dividends

The Carrie Finances: Should I Stop Reinvesting My Dividends?

Back when I was uncovering my hereditary financial habits, I learned that my dad’s mom was an avid dividend investor. When my dad was 15, his mom bought him stock in IBM Corp. (IBM) to get him interested in investing. She also put him to work and had him oversee her dividends. My dad would have to maintain a manual bookkeeping spreadsheet to verify which amounts were going into her account and match the dividend depending on the company and the month. All of this was done on paper, adding another level of difficulty.

These days, the process is much more automated, to the point where you might not even know when you receive dividend income unless you regularly check your brokerage account. After years of reading about reinvesting dividends in articles for AAII Dividend Investing, I couldn’t help but wonder: Should I stop reinvesting my dividends for a little extra income in these hard times?

A dividend is a payment that companies make to their investors using excess profits, usually on a quarterly basis. Much like an annual cost of living adjustment in salary, companies are expected to increase their dividend annually to keep up appearances and keep their investors around.

My portfolio is invested in five environmental, social and governance (ESG) exchange-traded funds (ETFs). I don’t require any dividends as part of my investing strategy, but when I started investing, I chose to reinvest the dividends that each of my ETFs pays. The most common way investors reinvest their dividends is through an automated process called a dividend reinvestment plan (DRIP). These plans require that you hold at least one share of the dividend-paying security in a brokerage account.

The main advantage to reinvesting your dividends is the magic of compounding: An investment that reinvests in itself will make more money in the long run. When a dividend is reinvested, it means that you are buying more shares of the security with that dividend. I can tell which of my investments have dividends in my brokerage account by looking at the number of shares I own under “Quantity”:

Most of my share counts are not whole numbers, even though I initially bought whole shares of each ETF. Some investments don’t allow you to buy fractional shares, so this is another advantage of reinvesting dividends. There are also no fees involved in the dividend reinvestment process, which used to be more of a flex before most brokers made investing commission-free.

According to Investopedia, one of the times you should consider not reinvesting your dividends is when you are in or nearing retirement and need the extra income. Likewise, if an investment is not performing well, it’s not a good idea to reinvest more money in that holding.

Now for the moment of truth: How much dividend income is my portfolio receiving? In 2022, I got a whopping $4.03 in dividend payments. So far in 2023, I’ve received $20.08 in dividends, which was a direct result of adding more money to my investments. My Charles Schwab brokerage account estimates that I will receive a total of $48.53 in dividends this year.

Unfortunately, I don’t think $50 would make that big of a difference if I chose to stop reinvesting my dividends. (It certainly wouldn’t buy Carrie Bradshaw a new pair of shoes, but it might cover her drive-thru order below!) Regardless, the money would still be sitting in my brokerage account cash balance waiting to be invested, so I don’t see much of an advantage to interrupting the compounding process.

For now, I’m going to continue reinvesting my dividends and keep an eye on how that income increases as time goes on. If one of my ETFs performs so poorly that I don’t want to invest more money in it, it would be a candidate for deletion before I would consider stopping the dividend reinvestment process.

Hereditary Financial Habits: Introduction

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Before I got my first paid internship as a college student, money was something that was just out of my reach. Like many kids, I was given an allowance by my parents to do chores around the house. I would empty the dishwasher, set the table for dinner, take the garbage out, etc. I appreciated that there were also things I was expected to do that I didn’t get paid for, like doing my own laundry and cleaning my room. I would get paid for the things I could do for other people, but the things I didn’t get paid for had to be self-motivated; it was a great way to build discipline.

I learned from a young age that being independent and doing things for myself was an asset to me. To this day, I will try my hardest to solve any problem that arises before asking for help (yes, sometimes to a fault, but I’m working on it!).

As I’ve gotten older, I’ve noticed more similarities between me and my parents in the way we think, the way we conduct ourselves socially and how we interact with the world. Some of those things my dad will address as “the family curse,” others as his “insanity,” but one of the ripest that I want to break down further is what financial habits, if any, I inherited from my family.

Unfortunately, my grandma on my mom’s side died when I was very young, so all I have is stories about her. As I grew up, I learned that she was an accountant and started her own tax business in the 1950s. It wasn’t an easy time to be a woman, let alone a businesswoman. She was the only woman in her accounting class, and people questioned why she wasn’t getting a teaching degree instead. But she proved all of them wrong, and she went on to meet my grandpa on my mom’s side, who was active in his parents’ phone and answering service business. My mom’s parents ran the phone business together, and my grandma kept her tax business on the side up until the 1980s when my mom recalls a little old lady about four feet tall coming to the office asking for my grandma to do her taxes because she couldn’t possibly go anywhere else!

On my dad’s side, his father died very young, so we never got to meet him. But his mom was around for a little while after I was born. She was big into investing, and when she passed, she left her estate to my parents. My dad told me that when he was 15, his mom bought him stock in IBM Corp. (IBM) to get him into investing. To keep him engaged, she also had him oversee her dividends! My dad would have to verify which amounts were going into her account and match the dividend depending on the company and the month. They had a manual bookkeeping spreadsheet (on paper!) of when the dividends were expected that he helped to maintain.

So I grew up with a lot of business-minded people in my family. But how did that affect how I view money?

As a kid I used to think that my parents would always have enough money to take care of me, that money was something infinite, but I quickly learned that wasn’t the case. My parents had just made good decisions with their money and gotten lucky. I think the biggest lesson I learned from growing up in this environment was to save. When I started making a steady income, I was big into saving because I wanted to be someone who had reserves if something went wrong. If I had a sudden health issue and couldn’t work, I wanted to make sure I could live for at least a year on my savings. It also strikes me as an extension of my need to be fiercely independent; I didn’t think of asking anyone else for help if I fell on hard times, I expected to be able to handle everything myself.

How did you view money growing up, and how did that influence your relationship with money and investing?

Frosty, our littlest investor, doesn’t have a job so he invests all his time into waiting for food.