Everyone can understand the idea of compounding, even if we can't fully grasp the true long-term strength of compounding.
Owning shares is excellent over the long-term because when businesses re-invest in themselves they can create strong returns on that re-invested money. As the business grows in value the share price hopefully goes up too. Xero Limited (ASX: XRO) is a good example of this.
Many Australian businesses pay dividends. Paying fully franked dividends is the common way for shareholders to access the imputation credits. Share price growth plus dividend returns together can create really good returns. Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) is a fantastic example of a business delivering dividend and share price growth.
The question is: should you re-invest your dividends?
Well, I think you should definitely put your dividend money back into your portfolio one way or another unless you need the money to live on.
So, you can either receive the dividend as cash or re-invest the money back into the same business.
I imagine most fund managers would take all their dividends as cash – they want to allocate money to their best ideas at the best prices, not necessarily at the dividend re-investment date. If you have a large portfolio, or you're active with your investment movements, then taking the cash could be the right thing to do.
However, if you don't invest often then re-investing is probably the best thing to do. It allows you to build up your holding with that company whilst paying no additional brokerage.
Re-investing your dividends can be good way of slowly increasing the amount of money allocated to that share whilst your overall portfolio grows if you're investing additional capital into other ideas.
Foolish takeaway
So, whether you dividend re-invest or you add the dividend to your next investment I think it's a good idea to put the money back to work for your portfolio.
