Why You Should Wait Longer Before Spending Your Dividends
A dividend is a payment in cash or stock that public companies distribute to their shareholders. Income investors prefer to earn a steady stream of income from dividends without needing to sell shares of stock.
Dividends are how companies distribute their earnings to shareholders. When a company pays a dividend, each share of stock of the company you own entitles you to a set dividend payment. Dividends can be cash, additional shares of stock or even warrants to buy stock.
In Kenya, Saccos are the best alternative banking options as they provide members with low-interest rates while offering them high dividends. The best Saccos in the country pay higher dividends than banks on savings, making them a popular choice among Kenyans looking for savings and investment opportunities.
When you join a Sacco, you are entitled to dividends and interests. Members can get their dividends monthly, quarterly, semiannually, or annually depending on the policy.
Saccos such as Stima Sacco normally pay a good amount annually, clocking to 14% per share according to the board of directors.
Investors who own dividends face the question of what to do with this cash. You have several options:
- Spend it. Use the cash to supplement your income.
- Save it. Bank the money to fund a future expense.
- Invest it. Combine the dividend with other payments or sources of cash to buy shares of a different company or fund.
- Reinvest it. Use the money to buy more shares of the same company.
Dividend reinvestment is the process in which dividends paid out by a company or mutual fund are used to purchase additional shares of the stock or mutual fund.
Reinvesting dividends has the potential to accelerate the growth of capital.
The thing most people don’t realize is that not all monthly contributions are equal when it comes to computing dividends at the end of the fiscal(financial) year. The interest given is prorated based on how many months that investment has been with the Sacco for that fiscal year.
Contributions made in the first 2 months of the fiscal year of your sacco can account for about 30–42% of all your dividend earnings. What this means is that if you concentrate your efforts earlier in the fiscal year you can potentially earn double your interest.
Therefore when you reinvest, your money starts to compound faster.
If you reinvest in a growing dividend-paying company, you’ll likely win in two ways. First, you’ll profit if the stock price rises because you’ve added more shares to your stake.
Second, the stock’s dividends are likely to rise over time if it’s successful. So you’ll own more shares and each share will pay a higher dividend, which buys you even more shares and so on.