A reader recently asked:

“I have investments in shares and receive dividends, which I use to buy more shares. But I would like to know what else I can do with the dividends to make more money instead of just reinvesting in shares.”

Many investors share this concern, and it highlights an important principle of wealth creation: it’s not just about investing your savings, but also about making the income from your investments work for you.

Investing vs. Using Investment Returns

The journey to financial growth often starts with savings, followed by investing those savings—either in active businesses or passive ventures. Share investments are an example of passive investment, alongside options such as mutual funds, real estate, and gold.

While investing your savings is important, it is equally critical to plan how to use the returns from those investments—like dividends from shares. Your strategy depends on the purpose of your investment and your current financial needs:

• If your investment is for a specific goal, like children’s school fees, the returns may naturally be used for that purpose.
• If you need cash flow for daily expenses, investment returns can cover these needs.
• However, if your current expenses are fully covered, you can strategically invest the returns to generate additional income.

Diversify to Reduce Risk

In the reader’s case, they don’t need dividends for immediate expenses. The common approach of reinvesting dividends in the same shares exposes them to market risk. If stock prices fall during a market downturn, they could face significant losses, especially if funds are needed for emergencies.

To avoid this, it’s wise to diversify. This means directing your returns into less risky and more liquid investments that can generate additional income without jeopardizing your original capital.