---
title: "What is Dividend Reinvesting?"
description: ""
canonical_url: https://trendshare.org/how-to-invest/what-is-dividend-reinvesting
markdown_url: https://trendshare.org/ai/what-is-dividend-reinvesting.md
published: 2012-04-19
last_updated: 2017-06-17
content_license: https://trendshare.org/about/disclaimer
---
# What is Dividend Reinvesting?

Source: https://trendshare.org/how-to-invest/what-is-dividend-reinvesting
Updated: 2017-06-17
Everyone knows the goal of a business is to make money. Next year, the goal
is to make more than this year. The strategy of *how* this is
done—and the milestones the business reaches along the way—differ
from business to business.

Some stocks pour all of their [free cash](https://trendshare.org/how-to-invest/what-is-free-cash-flow)
back into the business to invest and to expand. Other companies pay some of
that free cash back to investors in the form of dividends. There are [good reasons to pay dividends](https://trendshare.org/how-to-invest/why-do-companies-pay-dividends) and [good reasons not to pay dividends](https://trendshare.org/how-to-invest/why-do-some-companies-not-pay-dividends); no approach is automatically better than any other.

Whatever the stocks you own do, hopefully they make the right choices. That
leaves other choices for you, such as *what do you do with dividend
payments*?

If you're investing for income, you probably cash out those dividends and
treat that money as income. That's an easy answer, and it may be the right one,
but it's not the only choice.

## What is Dividend Reinvestment?

If you're investing for growth, you have more options. Suppose you own
shares of [Coca-Cola](/stocks/KO/view). It pays a healthy dividend
every quarter, so you can almost set your calendar on getting a little bit of
money for every share of KO you own. That money could sit in your brokerage
account, perhaps earning a tiny bit of interest, until you eventually spend the
money or invest it in something else.

Another option is [reinvesting your dividends with a DRIP](http://www.dividend.com/dividend-investing-101/dividend-reinvestment-plans-drips/). A dividend reinvestment program (DRIP) is a
voluntary program which takes the quarterly payments you've earned and uses
them to buy as many shares of the stock as possible—even if you have to
buy fractional shares. In other words, dividend reinvesting allows you to
automatically buy more of the company with the profits you've made from the
company.

This example uses Coca-Cola because [Coca-Cola has a great shareholder service](http://www.coca-colacompany.com/investors/shareowner-services) which allows direct stock purchase and
dividend reinvesting. Not all companies do this, but many broker services
provide this feature for all stocks.

## Should You Reinvest Dividends or Take Cash?

Why should you reinvest dividends? It's quick and easy, and if you've found
a great company you want to own for a long time, you don't even have to think
about it. It just happens every three months—you own a little bit more
of the company. Just like compound interest, your ownership compounds, and you
make a little bit more in dividends next quarter and can buy a few more
shares.

This strategy is nice and simple. It doesn't require much
analysis—just check in every so often to see if a good company remains
good. You keep your money working for you, building on itself. (It also works
well with [dollar-cost averaging](https://trendshare.org/how-to-invest/what-is-dollar-cost-averaging).)

Why *wouldn't* you reinvest dividends? Perhaps there's a better place
to put your sudden windfall. Perhaps you believe Coca-Cola's current price is
not a bargain (you're glad you own it, but you have your eye on another
undervalued stock). You also may have to pay fee; [Coca-Cola has been criticized in the past for charging for its direct-stock purchase plan and its DRIP](https://seekingalpha.com/article/1418441-3-blue-chip-drip-programs-you-should-not-touch). [If you're paying fees of 2% or 3%](https://trendshare.org/how-to-invest/broker-fees),
you're giving away lot of potential gains.

You may be able to avoid these transaction costs by going through [your online broker](https://trendshare.org/how-to-invest/what-is-a-discount-stock-broker), but this isn't
always the secret how to reinvest dividends for free. Depending on what you
have to pay in taxes and fees—and the current price for the stock sending
you the check—you might have better places to put that money.

## How to Think about Dividends

You're legally entitled *somehow* to the money the business earns,
whether the directors of the company pay it out in dividends, reinvest it in
the business somehow, or [buy back their own stock](https://trendshare.org/how-to-invest/why-do-companies-perform-stock-buybacks). The question is what to do with dividends when you
get them.

One way to think of any dividend is as first going to cover the cost of the
broker fees spent buying the stock. A $10 dividend check has earned back the $4
or $8 or $10 spent buying the shares in the first place. Another $10 will cover
the cost of eventually selling the shares.

Beyond that, do whatever makes sense at the time. If the company has room to
grow, a dividend is free money to own more of a good company. Otherwise, [average dividend yield is 2-3% annually](https://trendshare.org/how-to-invest/what-is-dividend-yield).
Fortunately, you have several weeks between the announcement of the dividend
and its amount and its payment date to figure out where it makes sense to
reinvest dividends or not.

Whatever you decide, if you put that money back in the market, you're
letting that money work for you to earn you more money. That's investing.