Dividend Reinvestment

Cheat Sheet:

  • Using a dividend to buy more of that stock is called “dividend reinvestment.”
  • When you do this, you end up with more shares of stock instead of cash.

If a company issues a cash dividend, it will normally show up as cold, hard cash in your brokerage account. At some brokerages, you can buy more stock with the dividend for free so that you own more shares instead of holding extra cash.

For example, let’s say you own 0.5 shares of a stock trading at $100 per share and the company announces a $4 dividend. Ordinarily, you’d end up owning 0.5 shares and $2 of cash after the dividend was paid out.  But if you reinvest the dividend, you’ll own 0.52 shares (and no cash). The extra 0.02 shares came from buying $2 worth of a $100 stock.

This is called dividend reinvestment. Some brokerages do this for you, and some even do it for free. (Who’d want to pay a broker a commission just to reinvest that $2 of stock?!)

Once you’ve set up your account for dividend reinvestment, you’ll see your number of shares go up every time a company issues a dividend. This will happen automatically for all of the stocks you own (provided you bought them before the ex-dividend date).

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