Reinvesting Dividends

Reinvesting div­i­dends is a sim­ple con­cept. Instead of tak­ing your div­i­dend pay­out in cash you take it in stock (in the same com­pa­ny).

Reinvesting Dividends: The Pros

The pos­i­tive rea­sons to rein­vest div­i­dends:

1. Your next div­i­dend is larg­er (because you now have more shares).
2. If you’re just get­ting start­ed, you div­i­dend pay­ment is like­ly to be small in absolute terms. Even a high div­i­dend yield of 4% pays out only $4/year for every $100 invest­ed. Investing $1000 gets you $40/year or $10/quarter (the most com­mon div­i­dend pay­ment sched­ule). While it might be nice to have anoth­er $10 in your pock­et, it’s not life-chang­ing. You won’t miss the $10 a quar­ter in cash and will be amazed at how over the course of a few years div­i­dends will accu­mu­late.

Reinvesting Dividends: The Cons

This list is going to be longer but weak­er. They’re real­ly more excus­es than “cons.”

1. You still have to pay tax­es on div­i­dends even when you rein­vest them. Of course, it’s not like­ly to change your tax pay­ment in any mean­ing­ful way, so who cares?
2. There’s a lot of paper­work to keep track of because you have to pay the div­i­dend tax­es and then track how much each share costs (so each time you rein­vest div­i­dends, that’s anoth­er thing to track). Again, who cares? Your bro­ker­age will track this for you auto­mat­i­cal­ly.
3. Many bro­ker­ages (like Robinhood) don’t sup­port rein­vest­ing div­i­dends or if they do, don’t sup­port buy­ing frac­tion­al shares (mean­ing, if your div­i­dend pay­ment isn’t large enough to buy a whole share of stock they won’t let you buy a frac­tion of a share). Ok… find one that does. If your con­cern is that Robinhood is free, Stockpile only charges about a $1 trans­ac­tion com­mis­sion and does­n’t charge any­thing for rein­vest­ing.

Of course, points #1 and #2 above only mat­ter if you’ve invest­ed using tax­able accounts. If you even­tu­al­ly like what you learn on this site, and use mon­ey in an IRA to invest this way, tax­es don’t mat­ter until you with­draw mon­ey from the account (if it’s a reg­u­lar IRA) or nev­er (if it’s a Roth IRA).

A while ago I wrote a very pop­u­lar e‑book on div­i­dend rein­vest­ing. In fact, in review­ing it as I write this post, I’m still proud of the con­tent and unique point of view. You should have a look:

In short, rein­vest­ing div­i­dends means tak­ing your div­i­dend pay­ments as more stock instead of cash. More stock means more future div­i­dends, so your div­i­dend pay­check grows over time. This is what is meant when some­one talks about com­pound­ing. The more some­thing grows, the more it con­tin­ues to grow. When you com­pound some­thing, time is your best advan­tage. The fur­ther out in time you go, the larg­er the com­pound­ing effect.

For some­one get­ting start­ed div­i­dend pay­ments are small and won’t make a dif­fer­ence in your qual­i­ty of life or your tax oblig­a­tion. Reinvesting them puts your wealth accu­mu­la­tion on auto-pilot. I just don’t see any down­side to reivnest­ing div­i­dends.