Question

A customer, age 55, has a diversified portfolio of blue chip equity investments that pay a reliable cash dividend. The customer would like to retire at age 65. The customer has an expensive lifestyle, and even though he makes a good income, he uses the dividend income from his investments to pay his large monthly bills. The main problem that is evident here is that the:

Answer 1

Options :

A.) portfolio should be rebalanced to include a percentage allocation to fixed income securities because of the customer's age

B.) customer is unable to take advantage of the compounding effect of reinvesting dividends

C.) customer increases his tax liability by spending the dividends rather than reinvesting them

D.) customer needs to change his spending habits

Answer: B.) customer is unable to take advantage of the compounding effect of reinvesting dividends

Explanation: Investments have become a me a hugely important way of ensuring financial growth whereby individuals put hase stocks or shares in other to earn dividends. This investments has the capability of witnessing a very growth after the initial stock purchase whereby Dividend earned are accrued and reinvested thereby increasing the individual's investment capital and multiplying returns. In the scenario above, Dividend multiplication due to the compounding effect of the interest rate because the investor is unable to reinvest her Dividend and hence lose the huge benefit associated with compounding effect of Dividend Reinvestment in other to cater for her luxurious life style.