Carburton Street, London – It can be quite tempting sometimes to consider the dividends that you receive from your investments as some kind of treat from the company. It is especially tempting at this time of the year, when the finances get a little stretched, to simply spend those dividends instead of reinvesting them. It's quite easy to do. This is because once those dividend cheques disappear into your bank account they get mixed up with the rest of your income and just seem to vanish.
Don't worry if you happen to fall into this category of the compulsive dividend spender -- you are not alone. This is largely because the concept of total shareholder return is, perhaps, one of the least well-understood aspects of investing. You might feel that your shares are going up enough in value and there might not be any real need to do much with the dividends apart from spending it. But your investment in any company is made up not only of the capital gains but also the dividends that you receive. It is therefore important to consider them both.
Of course some companies do not pay a dividend at all. These tend to be high growth businesses that need the money to finance future expansion. There is a school of though that suggests companies should not pay a dividend at all but instead reinvest the money on behalf of its shareholders. This school of thought maintains that dividends are a waste of profit. After all we invest in a business to take part in the growth of the company and not to have the money returned to us, surely!
But if you happen to be invested in highly cash generative businesses that tend to reward shareholders with generous dividends, then it is important to reinvest those dividends as soon as they are received. Never forget that total shareholder return is comprised of stock appreciation plus the dividends that you receive. If you have trouble keeping your mitts off the money then why not opt for dividends to be paid in the form of shares instead. Many blue-chip companies offer this facilty. This method also helps you avoid additional commission charges. Alternatively buy more shares in the company as soon as practicable before the urge to spend gets the better of you. Remember that money makes money, which goes to make even more money!
More: Why Dividends Are Important
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