Dividend Reinvestment: Should I Do It?

A guide to help determine if dividend reinvestment is right for you.

By Matthew DiLallo – Updated Sep 26, 2025 at 12:18 PM | Fact-checked by Parker Hicks

Key Points

Dividend reinvestment uses the cash from dividends to buy more shares in the same investment, enabling the investor to capture the full benefit of compounding.
Investors can sign up for a DRIP account with a dividend-paying company or join automatic programs at their brokerage to reinvest their dividends.
Reinvested dividends are often taxable based on the type of dividend and income level.

Investors who own dividend-paying stocks face the question of what to do with the cash they receive from holding stock. Thankfully, there are several options available depending on your investment strategy:

Spend it. Use the cash to supplement your income.
Save it. Bank the money to fund a future expense.
Invest it. Combine the dividend with other payments or sources of cash to buy shares of a different company or fund.
Reinvest it. Use the money to buy more shares of the same company.

Let's explore the pros and cons of dividend reinvestment and whether it helps or hurts your future investments.

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An infographic explaining the difference between company-operated and broker-operated dividend reinvestment plans (DRIPs). — Image source: The Motley Fool.

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Dividend Payments

The distribution of a company's profits to its shareholders. Dividends are usually paid in cash but sometimes in company stock, as well.

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Fractional Shares

Fractional shares are partial ownership units of a stock, allowing investors to buy small amounts, making investment accessible with lower funds.

Here's an example. An investor owns 100 shares of a company that pays a $1 quarterly dividend, so they receive $100. However, because this investor signed up for their brokerage account's automatic dividend investment program, it gets reinvested into buying more shares. If shares trade at $25 apiece at the time of this dividend payment, this investor would then own 104 shares.

In the next quarter, this same investor would receive $104 in dividends. If the stock then traded at $26 per share, the investor's reinvested dividends would boost their shareholding to 108 shares. The wealth-compounding process would continue until the investor sold the stock or turned off the automatic reinvestment program.

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About the Author

Matt DiLallo has been a contributing Motley Fool stock market analyst specializing in covering dividend-paying companies, particularly in the energy and REIT sectors, since 2012. He also covers pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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