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
-
S&P 500 Tops 7,000, Fed Pauses Rate Cuts: Stock Market TodayInvestors, traders and speculators will probably have to wait until after Jerome Powell steps down for the next Fed rate cut.
-
The Met Opera May Sell Its Iconic Paintings. Is it a Good Investment?Buying the Marc Chagall murals would come with a big stipulation attached.
-
Do You Really Need All Those Phone Plan Perks?Unlimited data plans now come bundled with streaming, travel perks and device deals — but many people pay for extras they rarely use.
-
Today's Senior Living Communities Are Not Your Grandma's 'Old Folks' Home': An Expert Guide to Shopping for the Right FitSenior living facilities have improved and are as diverse as the people who inhabit them. Now, they're more than just a place to go — they're a place to grow.
-
3 Common Misconceptions About Working With a Financial PlannerThink financial planners are only for the wealthy and that AI can replace human advice? Nope. Even people with moderate wealth need professional advice.
-
Should You Consider Investing in the Quantum Computing Sector? This Investment Adviser Has Some SuggestionsInvestors interested in quantum computing could consider ETFs focused on cloud services enabling small businesses to use big technology.
-
4% and Chill? Find Out If This Distribution Rule Fits Your RetirementTake this simple quiz to discover whether the 4% Rule will work for you in retirement.
-
Yes, Artificial Intelligence Stocks Are BoomingIt's fair to ask about the latest tech boom, "Is it really different this time?"
-
I'm an Estate Planning Attorney: These Are the Estate Plan Details You Need to Discuss (And What to Keep Private)Gen Xers and Millennials would like to know if they're going to inherit (and how much), but Baby Boomers in general don't like to talk about money. What to do?
-
I'm a Financial Adviser: This Is How You Can Minimize the Damage of Bad Market Timing at RetirementPoor investment returns early in retirement on top of withdrawals can quickly drain your savings. The ideal plan helps prevent having to sell assets at a loss.
-
'You Owe Me a Refund': Readers Report Challenging Their Attorneys' BillsThe article about lawyers billing clients for hours of work that AI did in seconds generated quite a response. One law firm even called a staff meeting.
