BHP Group Ltd (ASX: BHP) investors will receive dividend cheques this week. But how do you reinvest your dividend payment properly?
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This week on the ASX, many investors will be looking forward to receiving that panacea of ASX investing – the dividend payment. Yes, that’s right, it’s a big week for dividend income investors. Eligible investors in BHP Group Ltd (ASX: BHP), Telstra Corporation Ltd (ASX: TLS), Medibank Private Ltd (ASX: MPL) and Newcrest Mining Limited (ASX: NCM), among others, will receive their (usually) bi-annual dividend payments.
Dividends are direct returns from income-producing assets. It’s always nice to see them arrive in your bank account with no real effort or labour expended. It’s passive income at its finest.
But with the receipt of dividend payments, investors have a choice as to how to spend them. Some investors might use dividends for their living expenses – paying bills or funding the next holiday. But for others, they now have a choice as to what to do with the unessential, but welcome, cash payment.
A house dividend
The easiest thing to do, of course, is to treat yourself. Dividends are the fruit of your capital, so it’s understandable that many people might be tempted to go out and ‘reward themselves’ for their past investing discipline.
But in this case, the easiest thing to do is not ‘the best thing’ to do – in my opinion anyway. See, dividends are part of the compounding process that all good ASX shares let us participate in. By pulling out capital, we are diminishing the future potential of our returns down the road.
So if we do want to keep the ball rolling by reinvesting our dividends, how best to do it?
Well, many companies offer dividend reinvestment programs (or DRIPs) for this end. A DRIP allows the company to automatically reinvest dividends on our behalf back into shares of the issuing company. This is a great method of harnessing compound interest in my view. This might suit you if you’re prone to lethargy or apathy when it comes to your investment portfolio (no one’s perfect!).
But I don’t use DRIPs myself. Why? Because by putting your reinvesting on autopilot, you’re accepting what price the market is dictating at any given moment for the reinvestment itself. I far prefer to pool my dividends in a ‘reinvestment account’ and use them to buy the first cheap opportunity that comes along, whether it’s for the initial dividend-paying company or otherwise. This helps make sure that I’m always getting the best bang for my buck on the markets.
Although I don’t use DRIPs myself, I think they are a useful and benevolent tool that investors who might be tempted to blow their dividends on an impulse buy. At the end of the day, as long as you’re ploughing any finds you receive back into the markets, you’re doing yourself a favour.
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Motley Fool contributor Sebastian Bowen owns shares of Newcrest Mining Limited and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.