Does your charity reinvest dividends it receives from Club holdings back into the shares that issued the dividend? Or does it keep the dividend in its cash for the purchase of shares at a later date? — Alex P. This is an important question and one where the portfolio’s charitable status does not allow us to take our own advice. In general, we recommend that investors reinvest dividends to realize the full benefit of compound interest. To really understand how powerful this can be, look at the historical performance of the S&P 500 for investors who held cash dividends versus those who reinvested them in the index. Over the past three years, an investor generated a return of 24.72% with dividends reinvested in the index. Investors who took cash dividends with a return of 0% had a total return of 24.52%. Over a five-year period, an investor who reinvested dividends had a return of 56.77%, versus 56.64% who took cash dividends. Over 10 years, reinvesting dividends generated a total return of 226.12%, compared to 204.71% for an investor holding dividends in cash. Granted, the results here don’t seem as material in three or five years, but that’s largely due to the recent bear market in 2022, which seriously affected performance in these shorter time frames. However, we are starting to see the spread widen significantly over a longer time horizon, even with last year’s abysmal returns. There is usually some sort of return on cash or other cash instruments, but it has been minimal for most of the past decade. To get close to the total return investors have achieved over the past 10 years with a simple reinvestment strategy, they would need to generate more than 5% of that money annually. If you keep an eye on every dividend payment and manage cash and are constantly wondering if your money is working for you, it might make sense to make the payments in cash. Also, if this is a source of income used for expenses, it makes more sense to take the money. However, for most investors, a simple dividend reinvestment strategy on autopilot is the easiest and most efficient way to ensure that your money is constantly working for you and that you realize the full benefit of compound interest. It’s one less thing to worry about, allowing you to focus more on other more important aspects of investing, such as doing the homework for individual companies and keeping abreast of what’s happening in each company. At the Club, we do not reinvest dividends. As a charity, all dividends and realized capital gains are distributed to charity at the end of the year. If it didn’t, we’d certainly reinvest dividends in the securities that paid them out – bearing in mind that we can always cut back and take a position later if it got too big or we just need some extra cash needed. (For a full list of the shares in Jim Cramer’s Charitable Trust, see here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charity’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO FIDUCIAL OBLIGATION OR DUTY EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
People walk along Wall Street outside the New York Stock Exchange (NYSE) on May 3, 2023.
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Does your charity reinvest dividends it receives from Club holdings back into the shares that issued the dividend? Or does it keep the dividend in its cash for the purchase of shares at a later date?
— Alex P.
