I Never Use the Money I Get in Dividend Income. Here's Why

There's a process I use to determine which stocks I buy for my brokerage account. I like to maintain a diverse mix of investments, and I also try to make a point to only invest in businesses whose finances are solid and whose operations I understand. 

Some of the stocks I own pay dividends regularly. Dividends aren't a requirement for me -- I'll invest in non-dividend-paying stocks if I feel that the businesses are strong and I have a reason to own a piece of those companies. But I'll admit that I enjoy owning dividend stocks because it's basically a second stream of income.

However, as tempting as it is to cash out my dividends when they arrive, I don't do that. Instead, I have them set up to automatically reinvest. Here's why.

It's all about meeting a long-term goal

The investments I have in my brokerage account are earmarked for my future. Granted, I have a separate retirement account that I invest in, too. The reason I also have a brokerage account for retirement is that tax-advantaged plans like IRAs and 401(k)s don't let you take withdrawals prior to age 59 1/2 without penalty. 

But what if I want to retire in my mid-50s? If I've saved enough, I feel that should be an option. And so I also keep investments earmarked for retirement in a regular brokerage account because these accounts aren't restricted. This means I can cash out my holdings at any time without a penalty.

But because my brokerage account is earmarked for my retirement, I don't allow myself to take the money I collect in dividends and run with it. Sure, I'd love the extra money to pay bills during periods when my expenses are up. And it would also be nice to use that money for leisure purposes, since it's really just extra. But I know that investing my dividends is the smarter move, so I intend to stick to that system, even if it means missing out on extra money in the near term.

Be careful when buying dividend stocks

The upside of buying dividend stocks is that you get two opportunities to make money. You can benefit from your shares gaining value over time, and you can earn money in the form of dividend income.

But one thing you'll need to be careful about is not getting lured by a generous dividend alone. Just because a company pays a large dividend doesn't mean it's in great financial shape or poised for growth. Companies may also cut their dividends or stop paying them when facing financial issues. So you'll need to look beyond dividends when making your decision.

As an example, Medical Properties Trust has an extremely generous dividend yield of 14.69%. It's hard to find that high of a yield elsewhere. But the company's share price is also down more than 51% compared to a year ago, and roughly 47% over the past five years. While the dividend it's paying may be generous, it's not so clear that this company is a winner.

This is just one example. The point, however, is that while dividend stocks can be beneficial to your portfolio as well as your near-term finances, it's important not to get too hung up on dividends alone. On my end, I make a point not to focus on dividends, but to look at them as extra money -- even if it's extra money I don't get to enjoy right away.