When you receive a dividend payment from your stock or fund, you can use it as you would with any other type of income. However, you have the option to reinvest your dividends as additional shares of stock, and it can really pay off over time.
Dividends can be paid monthly, quarterly, semi-annually, or annually, depending on the stock or fund on a per-share basis. After the stock or fund company finalizes its income statement and all of the financials are reviewed, the company will declare a dividend declaration date. Once it’s declared, the company has a legal responsibility to pay it.
Since dividends are paid on a per-share basis, the more shares you own, the larger the dividend cash payment amount you receive on the declaration date. If you reinvest your cash, or also known as DRIP (dividend reinvestment plan), the more shares or fractional shares you will own afterward by purchasing additional shares or fractional shares automatically of the same stock or fund in your brokerage account. But also note that dividends are taxable in standard (non-retirement) brokerage accounts.
The advantages of DRIP:
- You can easily set up a DRIP program with most brokerages and automatically reinvest dividend cash at no cost.
- Allows you to buy fractional shares.
- Most common stocks, fractional shares, preferred stocks, mutual funds, and yes even ETFs are eligible for dividend reinvestment.
- There are no commissions and/or service fees.
Something to consider with fractional shares. With stocks and ETFs, the only way to sell fractional shares is to sell your entire position. An example would be if you own 10.5 shares of 3M Co (MMM), you will have to sell ten shares, and the remaining 0.5 shares will be automatically sold by your brokerage.
DRIP is a great idea if you plan on holding stocks for a long time to compound your investments, and in some cases, it will save you money on commissions. If you are a retiree and rely on your dividend stocks for income, then DRIP investing is probably not the right choice for you.
Some popular dividend-paying stocks are ExxonMobil (XOM), AT&T (T), AbbVie Inc. (ABBV), Wells Fargo (WFC), Kellogg Co (K), Procter & Gamble (PG), Johnson & Johnson (JNJ), Honeywell (HON), and International Business Machines (IBM).
So, the decision is yours, DRIP or not to DRIP.