Please ensure Javascript is enabled for purposes of website accessibility

Ask a Fool: Should I Reinvest My Dividends?

By Matthew Frankel, CFP® - Apr 7, 2017 at 12:34PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you're not planning to use your dividend income to pay your living expenses, DRIPs are a smart way to put the money to work.

Q: I just bought my first dividend stock. Should I enroll in a dividend reinvestment plan?

There's no one-size-fits-all answer to this question, but I'm generally a big fan of dividend reinvestment plans (DRIPs) and enroll every dividend stock that I buy.

As the name implies, a DRIP is designed to allow investors to use their dividends to purchase additional shares of stock. Enrolling your stocks in a DRIP is usually a matter of a quick online form through your broker. If you enroll, when your stock pays a dividend, the DRIP will automatically use the payment to buy more shares of that stock at the current market price.

There are several advantages to using a DRIP:

  • Your dividend income is put to work for you immediately. The dividend never even shows up in your account -- it just buys additional shares right away.
  • You won't pay any trading commissions when your dividends are automatically used to buy more shares. Based on a $6.95 brokerage commission and quarterly dividends, this can save you nearly $28 per year per stock.
  • A DRIP allows you to buy fractional shares of stock, allowing you to invest 100% of your dividend payment every time. For example, if a stock trades for $100, and you own enough shares to receive an $80 dividend payment this quarter, a DRIP allows you to buy 0.8 of a share to add to your position, when you otherwise wouldn't be able to buy any at all.

Of course, if you rely on your dividend stocks to generate income, it's probably smarter to just let the cash dividends get deposited into your account. And if you own your dividend stocks in a taxable account, your reinvested dividends can still be taxed, just like if you had gotten them in cash.

In a nutshell, I believe the benefits of a DRIP greatly outweigh the drawbacks, and if you're not planning to use your dividend income to pay your living expenses, I suggest enrolling your stocks in your broker's DRIP.

Offer from The Motley Fool: The 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*

Tom and David just revealed their ten top stock picks for investors to buy right now.

Click here to get access to the full list!

*Stock Advisor returns as of 4/3/2017.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.