Tuesday, October 7, 2014


Like anyone else, I'm always pleased to see the value of my portfolio go up with share price increases.  However, I'm also mindful of the benefits to dividend investors during declining markets.  As a rule, dividend stocks drop less in declining markets, since investors are less likely to sell shares that they'll be collecting monthly or quarterly cash payments from.  So dividend investors benefit from price stability.

The big benefit to dividend investors like myself, who reinvest dividends to build their positions and increase cash flow is the increase in yields when stock prices drop.  As long as dividend payouts remain the same, when prices drop the dividend yield increases.  If you're reinvesting dividends, the new shares purchased with your dividends are paying out higher yields than shares you would have purchased at the higher prices.  If you have several months of declining stock prices, the average yield on your overall portfolio can increase dramatically.  Not only that, but your dividends are purchasing more shares at the lower prices than you would have gotten if prices remained high, increasing payments even more, since you own more shares.  

This really only applies to people like me who are working on increasing their portfolio holdings.  If you're at the stage where you are collecting dividends to pay your bills, it doesn't help to have the value of your portfolio drop.  Realizing this, I've come up with a plan to address this problem when I reach that stage.  I've decided when I'm ready to collect the cash dividends to live on, I'll collect only 75% of the actual cash each month and continue to reinvest 25% of all dividends collected.  So I'll continue to benefit from situations like declining markets and increasing investments each month will help address the problem of inflation when I retire.  Maybe not a perfect plan, but I think it will work out well for me.

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