Benefits of Reinvesting Dividends
Reinvesting dividends can be done through two investment options. Mutual funds give share owners the opportunity to invest their dividends into their stocks. Also, many companies have dividend reinvestment schemes to allow share owners to invest directly in the corporation’s stock. Either way, both investment plans provide similar benefits.
1. Investment growth
Reinvesting dividends allows compounding of revenues from the stock investment or mutual fund. Reinvested dividends are used to buy more stocks in the company, which in turn increases the percentage of dividend payment. Compounding is an excellent form of investment development and dividend investment makes it spontaneous.
2. Dividends remain operational
If your dividends are paid in form of cash or deposited into your account, you will not earn any interest on the investment account. On the other hand, if you get the dividends in form of a check, it is highly likely that they might get spent. Reinvesting dividends can keep your investments going and can help you reap nice profits over the long haul.
3. No commissions on investment
Many stocks usually have commissions as they have to pass through a broker. However, there are no commissions or fees when reinvesting dividends. As we all know commissions and charges can have an impact on investment return. Therefore, buying additional shares and mutual funds without paying commission will increase your returns on investment.
4. Easy to set up
Dividend reinvestment is easy to set up. You can fill in the details within just a few minutes, then have your dividends automatically reinvested. Once the dividends are reinvested, the shares are monitored automatically. In other words, you can receive cash and continue to reinvest the dividends.
There is a common misconception that DRIPS are not subjected to taxation. However, reinvested dividends are considered as income, thus are taxable. On the other hand, stocks are taxable when they are finally sold.