Should you reinvest dividends?

Look after the pennies and the pounds will look after themselvesAs an investor, should you reinvest dividends?

There are several benefits to reinvesting dividends:

  • avoiding commissions and fees on buying more stock;
  • helping you to save money and reinvest it in your portfolio;
  • encouraging you to reinvest money into the “winning” stocks that pay dividends.

In short, unless you need the money for a more important purpose, it’s a good idea to reinvest.

However, also remember to periodically rebalance your portfolio.  This means that you should look at your portfolio at least once a year to verify that it is properly diversified and has a healthy mix of growth and safer investments.

This could be painful – it’s not easy to take money out of the stocks that have increased in value, and perhaps put them into stocks and bonds that have not performed as well.  However, this is a simple and systematic way to lock in the gains from higher-performing stocks and reinvest them in safer investments.

[Image: Look after the pennies and the pounds will look after themselves by Mukumbura, on Flickr]

4 thoughts on “Should you reinvest dividends?

  1. I agree, with 2 caveats:

    1) If you have a diversified portfolio, reinvesting is great. If not, buy round lots – 50, 100, 1000 shares – and leave the dividends in a money market account to purchase a different equity.

    2) Share Cost (for tax purposes) can be harder when reinvesting is used. Check with your friendly neighborhood CPA about this.

  2. Thanks, Dion. Absolutely. When you reinvest, you will need to keep track of more different lots, and the accounting for this can get onerous (and expensive). – Mark

  3. I’ve been retired for about 15 years and I quit reinvesting dividends when I retired because of the difficulty in tracking how much stock and fractions of stock those dividends purchased. I have the dividends invested in a money market fund and can rebalance much easier.

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