A reader invests in shares and reinvests the dividends to buy more shares but wants to know how to make more money with those dividends.

Key Points:

1. Purpose of Investment Matters
   • If the investment is meant for specific needs (like children’s school fees), the returns should be used to meet those goals.
   • If the investment is for long-term goals or you don’t need the returns for current expenses, the returns can be reinvested to generate additional income.
2. Reinvesting in the Same Asset Has Risks
   • Reinvesting dividends in the same shares exposes you to market risk.
   • A stock market downturn could reduce the value of your reinvested capital, especially if you need cash in an emergency.
3. Diversification is Key
   • To grow your wealth safely, invest your returns in different assets than the original investment.
   • Example: If your original investment is in stocks, consider putting your dividends into less risky and more liquid options, like:
     • Money market funds
     • Bonds or fixed-income securities
     • Real estate
     • Gold or other commodities

Takeaway:
Don’t just “compound” by reinvesting dividends in the same shares. Instead, diversify your returns to protect against risk and create multiple income streams.