Collecting Dividends in Your Brokerage Account? This Could Be the Best Thing to Do With Them

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  • Dividend-paying stocks offer investors multiple ways to earn money.
  • If you're collecting dividends, reinvesting that money is a great way to make the most of it.

It's all about the long-term rewards.

Any money you need for near-term savings goals or emergencies should sit in your savings account. That way, you won't risk losing out on principal. But if you're saving for a long-term goal, then you're generally better off putting that money into a brokerage account and investing it.

Now you might own a range of stocks in your brokerage account, and that's a good thing. Diversifying your holdings is a great way to make money.

Meanwhile, some of the stocks in your portfolio might pay you an ongoing dividend. When companies make money, they can either use it to reinvest in the business or share some of the wealth with stockholders. When they go the latter route, it results in dividend payments.

Dividends are commonly paid on a quarterly basis. And that's a great thing, because it's predictable income in your brokerage account you can look forward to.

But tempting as it may be to cash out your dividends as they come in, a better bet is to put them to work. That way, they can help you grow even more wealth over time.

It pays to reinvest your dividends

Not all stocks pay a dividend. And companies that start out paying one can opt to slash their dividend or even stop paying one if they decide to go a different route.

Meanwhile, some companies' dividends aren't much to write home about. But other companies pay a very generous dividend.

AT&T, for example, has a 5.9% dividend yield. So if you own $10,000 in AT&T stock, it means you'd potentially be looking at $590 a year in dividend income.

Now you may be tempted to cash out your dividend payments and use that money as you see fit. After all, it's extra money -- a bonus of sorts. But a better bet is to reinvest your dividends so your portfolio grows even more.

In this example, rather than keep your $10,000 in stocks invested, you could, once your dividends are paid out, be investing $10,590 instead. That means you'll have all the more opportunity to gain wealth in your brokerage account.

Of course, not every company will pay that high a dividend. But if you make the decision to reinvest all of your dividend income, it could go a long way.

You can automate the process

Many brokerage accounts today offer what's known as DRIP -- a dividend reinvestment plan. What this does is takes your dividends and reinvests them automatically as they come in, so you don't have to think about it.

So, let's say that instead of cashing out your AT&T dividends, you decide to reinvest that money instead. If your brokerage allows it, which is likely the case, you can arrange to have that money invested back into AT&T so you can grow that portion of your portfolio.

Of course, you don't have to put the process on autopilot. You can also take your dividend payments and invest them in any stock or asset of your choosing. The point, however, is that if you don't need the money right away, reinvesting it could end up being a wise choice -- and one that makes you very wealthy over time.

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