What is the difference between dividend yield and dividend reinvestment?

What is the difference between dividend yield and dividend reinvestment?

Dividend yield is the annual dividend payment divided by the stock price, showing the return on investment. Dividend reinvestment, on the other hand, involves using dividends to purchase more shares, potentially increasing future returns.

Which strategy is better for long-term growth?

Dividend reinvestment is often better for long-term growth as it compounds returns over time, while dividend yield provides immediate income.

Can you give an example of how reinvestment works?

Sure! If you own 10 shares of a stock priced at $100 with a $5 dividend, you'd receive $50. If you reinvest that, you could buy 0.5 more shares, increasing your total to 10.5 shares.

What are the risks of relying on dividend reinvestment?

The main risks include market volatility affecting stock prices and the possibility of companies cutting dividends, which can impact your reinvestment strategy.

How do I decide which strategy to use?

Consider your financial goals, risk tolerance, and whether you need immediate income or prefer long-term growth. A mix of both strategies can also be effective.