Rather than diversifying, as a means of managing the risk, could you not buy an options contract to sell your stock at a price that locks in your profit? If the dividend that you receive can pay for the contract, you have invested risk free, which is surely better than buying other stocks that you have no guarantee will not bomb also.

This is a classic conundrum for which I hope I can shed light on.

There are 3 key reasons why you should “Cash Out”:

1) To take a Profit:

This is one of the most important rules of investing. You should take some profits while they are available! Until you sell the stock or cash-out on dividends, you will not have made a penny. Therefore, you should reap the benefits of your investment when it is presented to you. Think of it as an apple tree. When the apples are nice red and ripe you pick them for eating or for storing. If you don’t, then they may rot away, no longer being available. It’s the same thing with dividends.

2) For Diversification:

You should use the cash to Diversify into other investments. This way, if your stock that pays this dividend goes bad, then you won’t lose more money with it since you will have used the “earned” cash to buy something else.

You can even buy other dividend-paying stocks you want and continue with the same strategy; this way you would increase your overall portfolio of dividend-paying stocks while diversifying more. Be sure to diversify into different sectors (Oil, Consumer Staples, Financials, etc.)

3) For Tax reasons:

In most tax-jurisdictions, dividend payments are usually taxed at a much lower rate than other types of investment income (such as interest income or capital gains). So, this can save you even more money on your post-tax investment income.

Good Luck!

Great site and even better article on dividends! I’ll feature it tomorrow for all the Dividend-a-holics on the DA site

Cheers,
DA.

If this is a retirement income, I would suggest taking it

But if you building your retirement income, I would suggest reinvesting it.