How should I be using my dividends?
I have a portfolio containing $800,000. I do not need to take any money out for living expenses. My wife and I have Social Security and pensions of $110,000, plus rental income clearing $35,000 a year. Should I be taking my dividends in cash or should I re-invest?
Our preference as money mangers is to take the dividends in cash, as the tax impact is the same either way, then use the accumulated dividends over the year to actively mange the ongoing allocation of the portfolio.
One of the primary reasons behind dividend reinvestment programs was to avoid extremely high commision rates prevelant when executing odd lot trades. Today, with commision costs of about $5.00 per trade, that value proposition is diminished.
If your portfolio's average dividend rate is between 2 and 3% per year, you can use that cash flow as a tool to add a meaningful position to your portfolio each year at the price you want, and use that tool to better manage your diversification.
Hope this helps,
Based on the information you provided, I like the idea of taking the dividends in cash. With that amount of income you should consider municipl bonds as a source of income. If the dividends are not enough to sustain your needs then I woud pull out an annual sum from your portfolio and rebalance your remainer portfolio at least annually.
You state that your income is sufficient to cover your expenses at this time. Therefore, you do not need additonal income from the dividends, it is best to leave them in the account so you can benefit from compound interest!
Your dividends will earn interest along with your portfolio assets.
Congratulations on setting yourself up for a great retirement. Here's where I would start first.
1) Use the dividend to pay any debt off if there is any.
2) Make sure you have the cash needed to take care of anything that can happen. Depending on your house, you might be looking to upgrade/fix issues that will come within a few years. You might need a new car soon, plan to pay it cash...
3) If everything is already taken care of, I would reinvest the dividend within your current portfolio. You would use the technique called dollar-cost averaging going forward. As the markets fluctuate, you would buy less of your winners and more of your losers, reducing risk and helping you buy more shares when their prices are low.
You are in a great position to create a multi-generation fund to help your heirs (kids, charities, ...) with anything you feel is important to you. You might want to establish a trust with the help of an attorney, to put down in writing the wishes you have for this money you were able to accumulate.
I hope this helps.
I write a lot about purpose of different types of investments. Cash is a type of investment and should be looked at with a purpose to how it can assist your portfolio strategy. Sometimes holding cash can be the better strategy if you are waiting and looking for a great investment opportunity to invest in. You may notice that some of the great investors almost always have a certain amount of cash at any one time. Cash is fast to use and does not require the sale of another investment and settlement requirements to purchase another opportunity. But if that seems to be too much work then re-investing dividends might be the easier route to take.