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Wednesday, May 03, 2006

Dividend Reinvestment

Last time I spoke of Auto-investment to take advantage of "dollar cost averaging."

Now I'd like to tell you about something else you might find of value, and that is dividend reinvesting.

Dividend reinvesting is taking the dividends that the company would normally pay to stockholders via a quarterly check and instead, reinvesting it back into your stock account in the form of fractions of a share.

It's a good way to continually grow your stake in the stock market without having to tap into your savings or other investments.

Here's how it works. Suppose you have 100 shares of The Coca Cola Company. Let's say that Coke is paying a quarterly dividend of twenty five cents a share. If you did not take advantage of dividend reinvesting, you would get a check every three months from Coke for $25.

Wow. Think of what you could do with twenty five bucks. You could buy six "half double decaffeinated half-caf, with a twist of lemon" coffee drinks at Starbucks. Or you might want to download a bunch of ringtones or MP3 songs from the R&B artist du jour to load onto your cell phone, iPod, or BlackBerry.

Or, you could ask the company that manages your stock account to reinvest that twenty five dollars back into your account towards the purchase of additional shares.

Let's use the Coke stock example. Suppose Coke were trading at $50 a share. Now, instead of taking that $100 per year you would have frittered away, it were to go towards two additional shares of stock. Instead of having 100 shares, now you will have 102 shares. Just two percent more shares, granted, but remember that now you have slightly more shares against which the dividends will apply next time. In other words, next year you'll have $102 in dividends going towards the purchase of additional stock. Compounded over time, you'll find that increased investment worth more than those frivolities would have.

It doesn't take rocket science to recognize that to continue to reinvest your dividends will net you more shares in the long run, and a corresponding gain in your total portfolio. And because you are technically making regular, predictable payments into your account, you are also taking advantage of dollar cost averaging."

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