So yesterday I posted about limiting your risk in the stock market, and the vast majority of that plan centered around dividend stocks, and how I calculate them. I just wanted to sum up quickly why I calculate dividend stocks like I do, because I don’t think I did so properly yesterday.
A stock purchase is a loss. When you purchase it there is an inherent amount of money that you must sell it at to earn a profit from owning that stock. Now, Dividend reinvestments are different. Depending on your broker, you may be lucky enough to get into a plan where the dividend reinvestment is free of commission. To me this means the shares are 100% free. There is some room for debate here, because you are effectively gambling the value of that dividend, so say you get paid $10 in shares, at the current value, and the price goes down. Your shares lose value, for sure. But, you don’t actually lose shares.
Why This Is Good For You
First, I consider this a break even investment. Even if the entire stock bottomed out tomorrow, the worst you would lose on your dividend purchased shares is $0. You would only ever break even, because you have no hard capital invested in those shares. This is good for you in multiple ways. The first, and most obvious, is when the share price goes up, and you earn capital gains on your dividend investment. The second, and less obvious, is when the share price goes down. When the share price goes down, and your stock continues to pay a dividend, you’re actually earning more shares for the reinvestment because the price of the shares is lower, and you can afford more shares with the same dividend. This helps balance out the losses of the portfolio, and will help you even more when the stock price finally recovers, not to mention lowering the price that the stock needs to rise to be considered recovered.
I tried to clear this up with this post, but if you have any confusion as to why I consider these investments like I do, feel free to leave me a comment and hash it out! I’m always interested in hearing new and inventive strategies, or even old and tried and true methods, of investing!