What are the top reasons to reinvest dividends?
The topic of reinvesting dividends can be quite daunting; however, it can be as simple as changing a selection. It can be a great strategy for building long-term wealth. Check the following reasons for more info!
This post is about reasons to reinvest dividends.
Let’s dive into the top 3 reasons to reinvest dividends:
1. Compounding Growth
When dividends are issued in your investment account, the default is to deposit as cash. This can easily be changed in the settings. The best part is that you can change the setting for each fund you’re invested in. So if there are certain funds you don’t want to automatically reinvest dividends, you totally have that option! However, if you do want to automatically reinvest, you can choose to change that in the settings.
Reinvesting dividends means it’ll purchase additional shares using the dividends that were provided to you. Say you get $5 in dividends, reinvesting dividends means you’d purchase $5 worth of additional shares. Then, when it’s time for issuing dividends again, the amount of shares you have has now increased. Ultimately meaning compounding growth!
2. Tax-Advantaged Growth
Reinvesting dividends, especially, doing so in tax-advantaged accounts can be a GREAT tool to grow long-term wealth while minimizing the amount of taxes you owe! Think about it, the $5 in dividends you were issued, if it were in a regular brokerage account, even if you reinvest that amount, you’d still owe taxes on the $5. However, if held in a tax-advantaged account, specifically a Roth IRA, the dividends issued would not be taxed. As with anything invested in a Roth IRA, the gains are not subject to being taxed.
3. Long-Term Wealth Building
As you can see, with reasons #1 & #2, automatically reinvesting dividends can be a great tool to building long-term wealth. Building compounding growth in a tax-advantaged account is the recipe for building wealth!
To reiterate, the top 3 reasons to reinvest dividends are:
- Compounding Growth
- Tax-Advantaged Growth
- Long-Term Wealth Building
