I talked with a client recently about dividend reinvestment. The question came up as he placed a trade and was prompted to elect whether to reinvest dividends. It’s a great topic to understand so let’s look at it more closely

What are dividends?

Dividends are a sum of money paid out by a company to its shareholders from its profits. Dividends are paid out on a recurring schedule chosen by the company (ie: monthly or quarterly). Not all companies will pay a dividend. Some companies make the decision to keep profits within the business for reinvestment back into operations, research and development, buy-back of shares, etc. However, others choose to share the profits with shareholders and pay a portion out as dividends

How are dividends stated?

Companies declare a dividend on a per share basis (ie: $0.15 per share). Investors typically assess the level of a dividend from one company or another by comparing dividend yields, which is calculated as the annual dividend in dollars divided by the share price.

How are dividends paid?

Dividends are paid out in cash. However, shareholders have the option of accepting the cash or using the cash to buy additional shares in the business. This purchase of more shares using the proceeds from a dividend payment is known as dividend reinvestment.

How do you elect dividend reinvestment?

Dividend reinvestment is an election you make via your broker/dealer. Nowadays, it can be easily done online (either at the time of your buy or later on). You can amend your election at any time and it does not need to apply over your entire holding period of the stock.

How should I decide to reinvest (or not)?

Dividend reinvestment is up to each investor. Some enjoy the concept of adding to a favored position incrementally over time. While dividend payments typically aren’t that material, over many years, the reinvestment could meaningfully increased your position size. Many investors also prefer reinvestment so they don’t have to remember to take action with the cash as it builds up over time.

Other investors prefer to skip reinvestment so they have cash added to their account, either for additional trades or to fund their spending in retirement or supplement their income. Others prefer to receive the cash so they can make an active choice to buy the stock that paid the dividend or select another one at that time.

The decision concerning what to do with dividends should be evaluated on a stock-by-stock and investor-by-investor basis. Hopefully this helps you make the decision for yourself!