Receiving dividends is one of the most rewarding things, financially, in my view. Businesses are doing their best to make a profit and it's delightful that they're sending some of that to us each year.
But once we receive that cash payment, what are we supposed to do with it?
There's no one correct answer, it depends on what the investor wants to achieve. I'll share some of my ideas.
Image source: Getty Images
Spend the dividends
There will be plenty of Aussies that own ASX dividend shares to pay for life expenses. So, it's a perfectly reasonable thing to do just to spend them on necessities.
Of course, some households may not need that cash flow, but that money could still be used to pay for extra discretionary spending or even a holiday. It can be a good idea to enjoy our money while we can.
I feel comfortable spending some of my dividends each year because I'm expecting the business to pay another dividend next year. The payout could potentially be increased, boosting my potential spending (if I don't want to use that money for investing).
Add it onto the next share investment
The power of the share market means there are several ways to experience wealth growth. We can choose to spend the dividends we receive and that business can still deliver dividend growth and share price growth for us.
But, we can supercharge our wealth by putting the cash we receive onto the next share investment that we make.
If you're the type of investor that likes to invest in the best opportunity possible each trade, the dividend cash can be a useful addition to that investment and hopefully unlock stronger returns.
Dividend reinvestment plan
Some investors may wish to utilise their share's dividend reinvestment plan (DRP). This allows shareholders to receive additional shares rather than the cash payment.
This may appeal because it allows the investor to increase their stake in the business for no brokerage costs. Plus, some businesses may issue those new shares at a discount to the share price. Some of the shares I'm invested in have DRP discounts ranging from 2% to 5%. Duxton Water Ltd (ASX: D2O) is one example. Receiving additional shares at a cheaper price can be an extra tailwind for supercharging our wealth.
I believe all three choices are a good idea for improving our life and/or wealth.
