Should I reinvest dividends?

Many investors use dividend stocks as a source of income, but what should you do if you aren’t dependent on the stream of income?

The question we hear a lot: should I reinvest dividends?

It depends on your situation.

Why reinvest dividends?

The main reason to reinvest dividends is that you don’t need the cash and you want to accumulate more shares of the company without paying a brokerage fee. Many brokerages permit free dividend reinvestment.

With some companies, you can also buy shares and directly elect to reinvest dividends through what’s called a dividend reinvestment plan, also known as a DRP or DRIP.

Reinvest, buy other stocks, or bury the cash in your back yard?

For the most part, we’re fans of putting as much as you can comfortably manage into outstanding companies that are positioned to thrive over the long term.

But when deciding whether to reinvest your dividends, consider whether the stock is still selling for a price you’re willing to pay. After all, its current price is what you will be paying for shares.

Here are some reasons you might not want to reinvest dividends.

  • You need the cash because you’re retired and it serves as income.
  • You want to invest the cash in other companies.
  • The dividend-paying company already occupies a sufficient chunk of your portfolio, and there is no need to accumulate more shares.

And no, we don’t recommend burying your dividend checks in the back yard — too many people forget exactly where they buried it.

One last note about dividend reinvestment: Even if you are reinvesting dividends, you still have to pay income tax on them as if you had received them as cash.

Need help picking dividend stocks for your portfolio? Click the link to see a world of high-quality, sustainable dividend-payers available within The Motley Fool’s Income Investor service.

— Answer provided by Motley Fool members Paul Thomas and Jeb Sturmer

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