Most people are familiar with the concept of compounding interest, but dividend reinvestment is another powerful strategy for growing a retirement investment account. Reinvesting cash dividends to buy more shares can significantly boost retirement savings and returns, making it a helpful addition to a retirement plan.
Dividend reinvestment is a straightforward process. Investors can either receive cash dividends or instruct the mutual fund or broker to reinvest them automatically to purchase additional shares. For instance, if the closing price of a mutual fund on the dividend payment date is $11.00, and the per-share dividend is $1.10, the reinvested dividends of 10 shares would buy one more share.
Suppose at age 60 in 2005, you had invested $10,000 in Chevron and then spent the next 20 years reinvesting dividends (totaling $24,654). The value of your Chevron stock would have grown to $65,181 — a 522% increase. If you had opted instead to take the dividends in cash (totaling $15,745), your shares would be worth $30,799 for a total return of 365%.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Advantages of dividend reinvestment
- Shares acquired by dividend reinvestment don’t incur a commission or fee.
- The increase in the value of a mutual fund holding usually accelerates with the ownership of additional shares.
- Dividend reinvestment is a form of dollar cost averaging, the practice of buying a similar number of shares regardless of the price per share. Research has demonstrated this practice can decrease volatility.
When to avoid dividend reinvestment
The dividend reinvestment strategy may not be for you in the following scenarios.
- You’re nearing retirement or already receiving distributions from a retirement account. You should evaluate your need for income versus your need for continued growth. You could opt to maintain dividend reinvestment for some securities and receive cash dividends on others.
- An investment is performing poorly. You should evaluate whether to retain the position or cease dividend reinvestment.
- Keep in mind that since dividend reinvestment increases the number of shares held, you will need to rebalance your portfolio periodically.
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
Read More
-
I'm want to give my 3 grandkids $5K each for Christmas.You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
If You're Not Doing Roth Conversions, You Need to Read ThisRoth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us?A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm Retired and Want to Give My 3 Grandkids $5,000 Each for Christmas, But Their Parents Don't Want Them to Spend It All.
You're comfortably retired and want to give your grandkids a big Christmas check, but their parents are worried they might spend it all. We ask the pros for help.
-
I'm a Financial Planner: If You're Not Doing Roth Conversions, You Need to Read This
Roth conversions and other Roth strategies can be complex, but don't dismiss these tax planning tools outright. They could really work for you and your heirs.
-
Could Traditional Retirement Expectations Be Killing Us? A Retirement Psychologist Makes the Case
A retirement psychologist makes the case: A fulfilling retirement begins with a blueprint for living, rather than simply the accumulation of a large nest egg.
-
I'm a Financial Adviser: This Is How You Can Adapt to Social Security UncertaintyRather than letting the unknowns make you anxious, focus on building a flexible income strategy that can adapt to possible future Social Security changes.
-
I'm a Financial Planner for Millionaires: Here's How to Give Your Kids Cash Gifts Without Triggering IRS PaperworkMost people can gift large sums without paying tax or filing a return, especially by structuring gifts across two tax years or splitting gifts with a spouse.
-
'Boomer Candy' Investments Might Seem Sweet, But They Can Have a Sour AftertasteProducts such as index annuities, structured notes and buffered ETFs might seem appealing, but sometimes they can rob you of flexibility and trap your capital.
-
Quick Question: Are You Planning for a 20-Year Retirement or a 30-Year Retirement?You probably should be planning for a much longer retirement than you are. To avoid running out of retirement savings, you really need to make a plan.
-
Don't Get Caught by the Medicare Tax Torpedo: A Retirement Expert's Tips to Steer ClearBetter beware, because if you go even $1 over an important income threshold, your Medicare premiums could rise exponentially due to IRMAA surcharges.
