By Babajide Komolafe
“I have investment in shares and do receive dividends from the companies which I use to buy more shares. But I would like to know what I can do with the dividend, to make more money instead of just reinvesting in shares.”
The above request is from a reader. I believe there are many people who have similar desires.
The journey to being rich starts with savings, followed by investing what you saved either in an active or passive business. Investing in shares of companies is an example of passive investment. Other types of passive investment include mutual funds, real estate, gold etc.
While it is important to invest your savings, it is even more important to know how to invest the income from your investment, which, in the case of the request above, is the dividend from share investment.
However, this depends on the purpose of the investment and your need for money.
If you saved for children’s school fees and invested the money in shares, definitely, when the time comes, you will use the money invested and the returns (or income) to pay for the school fees.
Also, if the purpose of the investment is to generate cash to meet your current needs, then the returns of the investment will be used for such purpose.
But if you have enough to cover your current expenditure, such that you don’t need to spend the return on your investment, you must consider what to do with the returns to make sure they generate additional income for you.
The same goes for returns on money invested for long-term purposes, like retirement.
It is obvious that the source of the request above does not need the return for his present expenditures. So, for someone in this situation, how do you invest the return in a way that it generates more money?
First, as much as possible, don’t put the return in the same investment as the original savings. This is what the reader is doing, reinvesting the dividend in shares.
In his case, the stock market may experience a meltdown with the value of shares falling drastically. And if he happens to need money for an emergency during this period, he will suffer serious loss of capital.
That is the risk of putting the returns in the same investment as the original savings. You should diversify. This means you put your return in a less risky and more liquid type of investment.
The post How to make more money from your investment (1) appeared first on Vanguard News.
