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Dividends: Take the cash or reinvest?

Key Points

  • Dividends contribute to your total investment returns over time.
  • You have the option of reinvesting dividends or sweeping them into a cash account to help with spending needs.
  • Your Ameriprise advisor can help you evaluate your investment strategy and cash situation.

Dividends can account for a material portion of total stock returns in your portfolio over time. Depending on your financial goals, you could either:

  • Reinvest them to help generate additional account growth.
  • Use them for income, such as to boost your cash flow during working years or help cover essential expenses in retirement (without tapping into investments).

Here are considerations to discuss with your Ameriprise financial advisor.

Dividend reinvestment

A company’s board of directors may decide to pay shareholders a portion of its profits through the form of a dividend. While most companies strive to pay a stable dividend, during uncertain economic periods such as the current one, dividends might be reduced, suspended or eliminated. However, many high-quality companies with stable businesses and predictable profits can generate dividends across a range of market environments.

As the following chart illustrates, it’s not just about how much a stock price increases. Over the long term, dividends account for a sizeable portion of total returns.

When a company pays dividends, you can use them to buy more shares of that stock — this is known as dividend reinvestment. Over time, your investment has the opportunity to compound in value and potentially generate more dividends.

Dividend income

Selling investments for income when the stock market is under pressure and volatile can detract from long-term investment success.
Instead, you might consider dividend income to help meet your needs. A broadly diversified portfolio should continue to produce some income, even while the prices of securities are down. In addition, bonds in the current environment should continue to pay interest, which is income coming into your account.

Instead of reinvesting the dividend income, consider transferring it into a different account. In retirement planning, this is called sweeping income. A well-designed dividend income strategy can help reduce the likelihood you’ll need to sell as many securities in times of market stress and to meet spending needs.

Revisit your long-term investment strategy

Your Ameriprise financial advisor will continue to help you navigate uncertainties and stay on track to achieve your financial goals. If your goals, risk tolerance or financial picture have changed in the current conditions, talk to them. Your advisor will make balanced, diversified portfolio recommendations that are personalized to your financial goals and needs. Your advisor can also help you evaluate your cash situation if you are facing reduced income or future concerns resulting from recent economic conditions.
 

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Individual securities referenced are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell.
The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall US equity market. Over 70% of all US equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.
Dividend payments are not guaranteed and the amount, if any, can vary over time.
In general, equity securities tend to have greater price volatility than debt securities. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. 
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities. 
Diversification and asset allocation do not ensure profit or protect against loss.
Past performance is not a guarantee of future results.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.