Dividend Reinvestment, otherwise know as DRIP is an investment strategy that allows investors to reinvest their dividend earnings back into a company. For example, if you were to invest in a company that pays dividends, you can reinvest the earnings that you have received from those dividends and purchase more shares or fractional shares from the company. Today, many brokerage offers a DRIP option, which allows them to easily reinvest your dividend earnings for you.
Is Dividend Reinvestment (DRIP) a Good Idea?
Nowadays, there are many dividend investors that uses DRIP. The idea that your money in dividend stocks is making you even more money, fascinates many people. With DRIP enabled, you typically do not have to pay any brokerage fees. And whether you like it or not, dividend reinvesting forces you to use the dollar-cost averaging method. Meaning, you can sometimes reinvest your dividends when the prices is either overvalued or undervalued.
Also, dividend reinvesting is not a get-rich-quick scheme. DRIP is mainly for long-term investors who wants to grow their portfolio’s value overtime. Though, that is a huge selling point for many long-term investors.
Lastly, dividend stocks typically do not grow as fast or as much as growth stocks. Meaning, the prices tend to be pretty consistent. This is good for those who are wants a non-volatile price, but bad for those who want to see growth in a stock. Dividend stocks aren’t as volatile since those companies’ business model tends to be pretty mature. This gives the company to save on research & development and gives them very little room to grow.
Is Dividend Reinvestment (DRIP)Taxable?
As of 2021, DRIP is taxable. At least in the US, whatever money that you have made from qualified dividends will be taxed based on your capital gains tax rate. Unqualified dividends, such as REITs (Real Estate Investment Trusts), are taxed at your ordinary income tax rate.
What Happens When Dividends Are Reinvested?
When dividends are reinvested, your brokerage will automatically take your dividend earnings and reinvest your earnings back into the company that paid you. This means that your earned dividends won’t give you a cash flow, until you have disabled DRIP.
How Can I Track My Reinvested Dividends?
While many people today still track their investments either on their brokerage website or on an Excel spreadsheet, the most easiest way would be using our Dividend Portfolio. Our portfolio tracker allows you, the investor, to easily track all of your stocks under a single website. You can import your stock information from multiple brokerage, where all of your stocks can be unified together. Making our portfolio a one-stop place to view your total portfolio value.