Ask a Fool: When Should You Not Reinvest Dividends?

Dividend stocks have gotten more popular than ever as a source of income, but what if you don't need the cash that dividends provide? Reinvesting dividends often makes a huge difference to your long-term performance, but there are cases when it's the wrong move.

In this installment of our "Ask a Fool" series, Fool contributor Dan Caplinger answers a reader's question about when you shouldn't reinvest dividends. Dan notes that reinvesting dividends can work out badly if a stock stumbles, and so you should closely evaluate each dividend payer in your portfolio to see whether dividend reinvestment is appropriate. He also gives some guidelines for other situations when you should think twice about reinvesting your payouts.

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Comments from our Foolish Readers

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  • Report this Comment On May 27, 2013, at 6:48 PM, grandpaduck wrote:

    Also, remember the FEES for any dividend reinvestment program. I once had a stock, just a few hundred shares, and I got $ 10 dividends each quarter, but the bank charged $ 5 for the reinvestment. It also seemed to buy the partial shares at the high each month. The stock raised its dividend to $ 12, I thought, good, but the bank raised its fee to $ 6. I sold, and never looked back.

  • Report this Comment On May 27, 2013, at 9:54 PM, lanceim59 wrote:

    You must have the worst brokerage ever. Most firms don't have a DRIP fee.

  • Report this Comment On May 27, 2013, at 10:15 PM, DCDiver wrote:

    I understand that it might not be the best decision to invest a dividend back into that particular stock. I don't do that, I add it to the savings I'm adding to the account and make decisions in what equities I intend to purchase.

    So does it ever make sense to not reinvest the dividend back into the portfolio?

  • Report this Comment On May 28, 2013, at 12:28 AM, Chuck2010 wrote:

    Not reinvesting can make sense if you are retired and are going to have to sell investments (triggering additional taxes) to raise cash to pay for living costs vs letting the dividends go into the cash balance for withdrawal.

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