How to Reinvest Dividends Efficiently

Learn the mechanics of dividend reinvestment plans and automatic reinvestment to compound your investment returns over time.

1. Choose between DRIP and brokerage reinvestment. Company dividend reinvestment plans (DRIPs) buy shares directly from the company, often with no fees and sometimes at a small discount. Brokerage automatic reinvestment buys shares on the open market through your existing account. Most brokerages now offer commission-free dividend reinvestment, making either option viable.
2. Enable automatic reinvestment in your account. Log into your brokerage account and look for dividend reinvestment settings, usually under account preferences or dividend options. Toggle reinvestment on for each holding you want to reinvest. This typically takes effect for the next dividend payment cycle.
3. Verify fractional share purchases are enabled. Most brokerages now allow dividend reinvestment to buy fractional shares, so a $47 dividend can buy 0.23 shares of a $200 stock instead of leaving cash sitting idle. Confirm your account supports this feature, as it maximizes the efficiency of small dividend payments.
4. Monitor for tax implications in taxable accounts. Reinvested dividends in taxable accounts still count as taxable income in the year received, even though you didn't receive cash. Keep records of reinvestment prices to calculate your cost basis accurately when you eventually sell. Consider prioritizing dividend reinvestment in tax-advantaged accounts like IRAs when possible.
5. Review and adjust periodically. Check your reinvestment settings annually or when your investment strategy changes. You might want to stop reinvesting if a holding becomes too large a portion of your portfolio, or if you need the dividend income for expenses instead of growth.