How to Use Dividends: Grow Through Reinvestment vs. Enjoy Through Spending – A Practical Guide

My Journey with Dividends

In 2019, I began implementing a dividend reinvestment strategy in earnest, starting with approximately ¥100,000 in annual dividends. Fast forward to 2024, and that amount has grown nearly twentyfold to ¥1.9 million in just five years. The key to this growth? Relentlessly reinvesting my dividends. By maintaining a frugal lifestyle and focusing on building my wealth, I was able to achieve this remarkable progress.

Recently, however, I’ve started to consider not only “growing” my dividends but also “enjoying” them. Exploring how to use dividends has opened up new possibilities in my financial journey. For those just starting to accumulate dividends, I highly recommend being mindful of how you plan to use them. Striking a balance between growing your wealth and enjoying life is essential.

Why I Started Investing and How My Strategy Evolved

Before diving into investments, my assets were entirely in cash savings. Realizing the need for more effective wealth-building, I began investing and gradually reduced the cash portion of my portfolio to about 20% of my total assets.

Initially, my primary focus was to grow my dividend income as an additional revenue stream beyond my salary. By reinvesting all my dividends and minimizing spending, I was able to significantly increase my assets. Now, I’m in a position to think about spending those dividends as well—whether on family experiences or personal growth. For instance, I’m looking forward to using dividends to fund future trips with my son, creating memories that will last a lifetime.

Understanding Dividends and Investment Terms (For Beginners)

For those new to investing, here are some basic terms explained:

• Dividends: A portion of a company’s profits distributed to shareholders. For example, if you own ¥1,000,000 in a stock with a 5% dividend yield, you’ll earn ¥50,000 annually.
• Reinvestment: Using dividends to purchase additional stocks or mutual funds, further growing your portfolio.
• Compound Growth: The process where reinvested earnings generate more earnings over time. For example, reinvesting dividends can create a snowball effect, exponentially increasing your income.
• Index Funds: Mutual funds that track market indices like the S&P 500. They offer low-cost, diversified investing, making them a great option for beginners.

Two Ways to Use Dividends: Reinvest vs. Spend

Dividends can primarily be used in two ways: reinvestment for asset growth or spending for life enjoyment. Each method has its advantages and drawbacks, and choosing the best approach depends on your life stage and goals.

(1) Reinvesting for Growth

Reinvesting dividends allows you to harness the power of compound interest and steadily grow your assets.

Practical Examples:

1. Buying More High-Dividend Stocks
   If you earn ¥100,000 in dividends annually and reinvest it into high-dividend stocks with a 5% yield, you’ll earn an additional ¥5,000 the following year. Repeating this process accelerates dividend growth.
2. Investing in Index Funds
   Using dividends to buy index funds tied to markets like the S&P 500 or NASDAQ 100 helps you build long-term wealth with diversification.

(2) Spending for Enjoyment

Using dividends for present-day spending can enhance your quality of life, providing happiness and satisfaction.

Practical Examples:

1. Family Travel
   Plan domestic or international trips using your dividends to create lasting memories with your loved ones.
2. Investing in Personal Growth
   Use dividends to enroll in courses, earn certifications, or acquire new skills. For instance, spending ¥50,000 annually on personal development can expand your career opportunities and knowledge.
3. Enjoying Hobbies and Entertainment
   Whether it’s buying equipment for your hobbies or attending concerts, spending dividends on things you enjoy enriches daily life.

Advantages and Disadvantages: Reinvestment vs. Spending

Reinvestment

Advantages:

• Maximizes Compound Growth: Reinvesting dividends accelerates future earnings.
• Faster Asset Growth: Your portfolio grows steadily over time.
• Increased Efficiency: Your money is constantly working for you.

Disadvantages:

• Reduced Liquidity: Reinvestment reduces the cash available for unexpected expenses.
• Market Risk Exposure: Relying heavily on investments increases vulnerability to market fluctuations.
• Limited Personal Enjoyment: Focusing solely on reinvestment may mean missing out on life experiences.

Spending

Advantages:

• Improved Quality of Life: Dividends can fund hobbies, travel, and family time.
• Immediate Satisfaction: Spending dividends gives you tangible rewards for your investment success.
• Mental Balance: Allocating dividends for enjoyment fosters a sustainable approach to investing.

Disadvantages:

• Slower Asset Growth: Spending reduces the pace of compound growth.
• Long-Term Goals Impacted: Excessive spending may hinder future financial independence.
• Decreased Passive Income: Spending large amounts now could limit future dividend growth.

Checklist: Avoid Becoming an Overzealous Investor

Focusing solely on wealth accumulation can lead to neglecting the enjoyment and purpose behind your financial goals. Use this checklist to stay balanced:

• Are dividends a means to an end, rather than the ultimate goal?
• Do you avoid feeling guilty about spending dividends?
• Are you prioritizing family, personal growth, and experiences alongside investing?
• Do you take time to appreciate the success of receiving dividends?
• Have you clearly defined your future goals and how you’ll use dividends to achieve them?

Life Stage-Based Dividend Strategies

Adopt a phased approach to using dividends depending on your stage in life:

1. Accumulation Phase (30s)

• Objective: Focus on growing your portfolio.
• Allocation: Reinvest 90%, spend 10%.
• Examples: Invest in high-dividend stocks or index funds; spend on self-improvement.

1. Transition Phase (40s–50s)

• Objective: Balance growth and quality of life.
• Allocation: Reinvest 60–70%, spend 30–40%.
• Examples: Continue reinvesting while funding family vacations or hobbies.

1. Enjoyment Phase (60s+)

• Objective: Use dividends to enhance your retirement lifestyle.
• Allocation: Reinvest 20–30%, spend 70–80%.
• Examples: Maintain a sustainable investment portfolio while prioritizing travel, health, and family.

Conclusion: Striking the Right Balance

Dividends are a powerful tool for both building wealth and enjoying life. However, focusing solely on reinvestment can lead to missing out on the joys of life, while excessive spending might jeopardize long-term financial security.

For those starting out, consider your goals for using dividends early on. By balancing reinvestment and spending, you can maximize the value of your dividends, ensuring both financial growth and a fulfilling life.