Dividend investing is one of the simplest ways to build up passive income. Do the initial research to find the right stocks, invest in those stocks, and keep collecting the dividend payments. Dividend investing is a great place to put your side hustle income.
It’s common advice to reinvest the dividend payments you receive so your return builds over time.
If you have $2,000 worth of stock that pays you $100 in dividend each year (5% yield), the common rule of thumb would be to reinvest the $100 back into the shares. That way, you have $2,100 worth of stock, and assuming the same 5% yield, you’ll make $105 instead of $100 the following year.
That does not include if the company decides to raise their dividend which is a part of the equation most people miss when calculating dividend income.
Looking at a company’s dividend history gives you an idea of how they raise their dividend. While Mastercard may have a microscopic dividend yield under 1%, they’ve more than doubled their dividend payout in the past 5 years.
Based on their payout ratio and overall sustainability, Mastercard will likely become a dividend aristocrat in the future.
But does it make sense to reinvest the dividend? For Mastercard, I reinvest every penny they give me because I like the company, and when it grows like this, I want to reinvest every penny they give me…
I’d take a 29.72% annual return for 10 years in a heart beat.
Now let’s look at a company like AT&T which has a juicy dividend yield of around 7% at the time of writing. While Mastercard is shaping up to be a future dividend aristocrat, AT&T is a current dividend aristocrat which has consistently raised its dividend each year for over 3 decades.
The issue with being a dividend aristocrat for that long and having a high dividend yield is that significant raises get more difficult. Since Mastercard currently doesn’t pay much in dividends, they have no problem growing it at an attractive rate.
AT&T on the other hand raises its quarterly dividend payout by $0.01/share.
Their 7% dividend yield makes up for the lack of dividend growth. Now comes the question…
Would I reinvest the dividend? The answer is no. I wouldn’t reinvest the AT&T dividend. Rather than reinvest into AT&T, I’d take the dividend and invest it somewhere else.
Remember, Mastercard had a 29.72% annualized growth over the past 10 years. Past results don’t guarantee future results, but Mastercard has a bright future ahead based on its existing business.
AT&T has a ton of debt, and while it has some opportunities as well, as an investor, you want the greatest return for your dollar. Based on the past 10 years of AT&T stock, I wouldn’t want to do DRIP for AT&T.
AT&T’s 7% dividend looks juicy, and Mastercard’s dividend yield isn’t even at 1% yet, but do you prefer a 7.22% annualized return over 10 years or a 29.72% annualized return over 10 years?
And yes, both of these graphs factor in dividend reinvestments, so everything’s getting accounted for in those graphs.
If you want to the annual returns for your favorite stocks, you can use this stock return calculator.
Each stock has their benefits, but you want to make sure you’re reinvesting dividends in a way that boosts your portfolio’s overall value.
AT&T provides far more upfront dividend income than Mastercard. Some dividend investors rely on their dividend income for their living expenses, and AT&T does a better job at helping you pay expenses.
However, if you have some extra money hanging around and want to boost your net worth, it would be better to invest it in companies more likely to appreciate even though they may offer low or no dividends at the moment.
That extra money hanging around can come in the form of a dividend payment from a company like AT&T.
I’m all for taking your dividends and investing them, but just because you receive a dividend from a company doesn’t mean you have to reinvest into that company. Sometimes, it’s better to take the dividend payment from one company and reinvest it into another.
If you are a dividend investor looking to use your dividend income to pay off your expenses, you may enjoy this video I recently created about the math behind making $1,000/mo from dividend investing. It includes the AT&T and Mastercard examples while providing some deeper insights.