Introduction to Dividend Reinvestment
Dividend reinvestment is a systematic method of accumulating shares of a stock that pays a dividend. Many investors use dividend reinvestment as part of a long-term buy-and-hold investment program. After you purchase a stock, simply enroll in the company's dividend reinvestment plan (DRIP) and your dividends will be automatically used to purchase additional shares. Also, you may send voluntary contributions to purchase additional shares. For a mutual fund be sure to check off the dividend reinvestment option on your application form.
Because you pay taxes on dividends, consider putting dividend reinvestment stocks in a retirement account so you can shelter the dividends from your current tax liability.
Setting up Your Dividend Reinvestment Account
Here are a few ways to reinvest dividends:
Use a full-service broker. Most brokerage firms let you reinvest dividends for the stocks you own in your account. Ask your broker for details.
Use an Internet discount broker who offers DRIPs (both this and the full-service broker offer the advantage of having all your stocks in one place, which ensures easy record keeping and tax and estate planning).
Buy directly from a company. Contact a company through its web site. Be sure to understand the fees charged by a direct stock purchase plan.
Buy from directinvesting.com, a direct investing service that offers many dividend-paying stocks.
Buy through a bank transfer agent. For example, see Global BuyDIRECT Plan, a BNY Mellon-sponsored dividend reinvestment and direct purchase program for Depositary Receipts of many non-U.S. companies.
- See the Computershare website for a comprehensive list of stocks in the Buy Stock Direct plan.
Always inquire about the fees associated with reinvesting dividends because some plans charge hefty fees. Remember that any fee, no matter the amount, reduces your profits.