Is it a better idea to reinvest my dividends or save/spend the dividends?

Much better idea to reinvest for me (since I'm Young and I'm drawing a salary) - Reinvesting allows you to roll your interest payments into more money, and make it work harder for you. If you spend your dividends, and you initially invested $10 000, your growth will purely be from capital accumulation. Let's say the market growth is 5%, after 10 years it is (10 000)(.05)^10 = $16288.9. Asumming your dividend payouts is 2% per year, so altogether if you spend all your dividends every year you have spent $200(1.05 + 1.05^2....+1.05^10) = $2641.4 worth of dividends in 10 years. This puts you up at $16288.9 + $2641.4 = $18930.3 total net worth, assuming we don't count inflation.

However, if you take this 2% per year and continue to accumulate it it is essentially making your capital gain to be 5% + 2% = 7% per year. So, after 10 years, you are looking at $10000(1.07)^10 = $19671.51. you would have gained a total of $741.21, or 3.92% more than if you would have spent all of your dividends away every year.

Imagine investing 100 000, or even 1 million! 3.92% is alot of money for such huge sums, and a longer investment period would definitely increase the gap further. If you have no need for the dividends, don't spend it. Money saved is literally money earned!

Hello!

This would depend on yourself and perhaps the current financial situation that you are in. If you are in need of money in the near future say about 6 months time, I think it would be good to save the dividends. If you are thinking of investment in the long term, reinvesting your dividends would be a better idea as this is when the power of compounding comes to play.

Hope this helps!

There are two types of savings account - emergency and future funds.

Do you have emergency fund at your bank account? Or do you think you have enough insurance coverage? If Yes, use the money for your future fund!

Future fund is your retirement money. The more money you have, less to worry when you reach that stage. Try to get a plan to enhance your future funds but with flexibility to cash out some amount when you need it. I hope this helps!

The power of compounding only works if you reinvest your profits.