Reinvest stock dividends — Looking at the 4 different way investors can reinvest dividend payments from dividend paying stocks. I am not a licensed investment advisor and this post is not investment advice.
All investors who hold dividend paying stocks have to decide how they want to reinvest stock dividends.
In short, investors have the following four choices:
- Withdraw the dividends and take the cash
- Reinvest the dividends in the same stock via DRIP (dividend reinvestment plan)
- Reinvest stock dividends manually into another stock
- Save up the dividends and reinvest a lump sum at a later date
In this post, I will look at the four different ways to reinvest stock dividends.
Let’s dive in.
Reinvest Stock Dividends — 4 Ways You Can Use Cash Dividends
Option 1: Withdraw And Spend Dividends (Reinvest In Yourself)
The first option that investors have at their disposal is to withdraw their dividend payments.
If an investor requires the cash from dividend payments, they can simply withdraw it to their bank account and spend the money.
However, I wouldn’t recommend this option unless you are already retired.
To put it bluntly, withdrawing the dividends will interrupt compound interest.
If you plan on spending the dividend income before retirement, the money is better off in the management’s hands. So, you are probably better off investing in stocks that don’t pay a dividend. This way, the management will reinvest for you.
Option 2: Reinvest Via DRIP (Dividend Reinvestment Plan)
Another option that investors can consider is to reinvest stock dividends via a DRIP.
For those who are not familiar with the term, DRIP stands for dividend reinvestment plan.
Of course, to reinvest stock dividends via a DRIP, the stock must offer a DRIP, and the dividend payment must be enough to pay for the cost of one share.
In some cases, the company may offer a discount on the share price for participating in a DRIP.
Related: DRIP Stock: (DRIP Stock Meaning) Are DRIP Stocks A Good Investment?
Option 3: Reinvest Stock Dividends Manually As They Are Paid
If you do not want to reinvest in the same stock or if the dividend payment is too small, investors can manually reinvest the dividends into other stocks.
Personally, I prefer to manually reinvest dividend payments because I can purchase the best-valued stock at the time.
Rather than reinvest in the same stock at a high valuation, it allows investors to diversify into other stocks and buy undervalued stocks.
Furthermore, it means investors are not limited to only dividend paying stocks. They can reinvest the dividends into whatever they want — cryptocurrency, growth stocks, ETFs, mutual funds, or what have you.
This method of reinvesting dividends also takes advantage of dollar cost averaging instead of timing the market. And it’s also the fastest way to grow a dividend income stream.
Option 4: Save Up The Dividends And Invest A Lump Sum
If investing small dividend payments all the time doesn’t suit your investment style, you can save up the dividends and wait for an opportunity to invest a lump sum.
Some investors will wait and invest all their dividends at the end of each year. Alternatively, some investors will save up cash and dividends until they find an investment opportunity.
One of the main benefits of lump sum investing is that it reduces commission costs from your brokerage.
However, zero-commission brokers have made this a less important consideration.
Since I believe in dollar cost averaging and because zero-commission brokerages are available, I typically reinvest dividend income right away rather than save up dividends to lump sum invest.
Do You Have To Pay Taxes On Reinvested Dividends?
Although you do not have to pay tax for reinvesting dividends, depending on the type of investment account you hold the dividend stocks in, you will have to pay tax.
For example, if you hold dividend stocks in a non-registered account, you will likely have to pay tax on the dividends.
However, if you hold dividend stocks in a tax-free investment account, you will not have to pay tax on dividends.
To be safe, it’s best to speak to an accountant or licensed tax advisor if you are unsure.
Reinvest Stock Dividends — Final Thoughts
In summary, investors who hold dividend paying stocks ultimately have four options to consider for their dividend payments.
They can spend, DRIP, manually reinvest, or lump sum invest their dividend payments.
Ideally, investors should wait until retirement to start spending their dividends to take advantage of compound interest.
So really, if you are in the wealth accumulation phase, there are only three options.
If the dividend paying stock is still undervalued and if it offers a DRIP, setting up a dividend reinvestment plan is a fantastic way to build wealth.
Alternatively, investors can choose to manually reinvest the dividends as they are paid out or save them up and lump sum invest.
Similar Articles On Dividend Investing To Check Out
DRIP Stock: (DRIP Stock Meaning) Are DRIP Stocks A Good Investment?
How Often Are Stocks Usually Paid?
How To Become A Dividend Investor
I am not a licensed investment or tax adviser. All opinions are my own. This post may contain advertisements by Monumetric. This post may also contain internal links, affiliate links to BizBudding, Amazon, Bluehost, and Questrade, links to trusted external sites, and links to RTC social media accounts.
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