Dividend Reinvestment vs Compound Interest

After reviewing Dividend Reinvestments and Compound Interest I would like to make a post comparing some pros and cons. I will also give my opinion as a follow-up.

Dividend Reinvestment

ProsCons
Shares are appreciating assetsStock market is unpredictable
More stocks = Larger dividends to reinvestCompanies may not be able to pay out dividends
Full control over your moneyRequires patience and emotional control

 

Compound Interest

ProsCons
Guaranteed to earn interestCan’t touch money until maturity date
Exponential growth in interestRequires patience and emotional control


Exponential growth in interest Requires patience and emotional control
It is important to understand what kind of investor you want to be. Both strategies will earn you money. One has risk and one is stable. I think my opinion is kinda obvious. I have already stated we follow dividend reinvestment. Compound interest to us can be viewed as long term investment for back up money that you don’t need within the next 3-5 years. Therefore in 20 years, you will get an “extra” chunk of cash. What we don’t like is that once that money is invested you cannot touch it until the maturity date has arrived. What separates these two is the fact that stocks will increase. You get a fixed rate for CDs and Bonds but stock themselves can increase +50% in 3-5 years. This will only increase your dividends, therefore, increasing the number of shares you own once reinvested. For investors, at our age, it makes perfect sense to invest your money in dividend-paying stocks. You won’t regret this decision.

Image result for MOney Stacks

 



Categories: Investments

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