The Benefits of DRIP Plans
If you reinvest dividends, you can supercharge your long-term returns because of the power of compounding. Your dividends buy more shares, which increases your dividend the next time, which lets you buy even more shares, and so on.
Advantages of DRIP Investing
DRIPs help you take advantage of dollar-cost averaging. With a dividend reinvestment plan, you buy shares of stock at regular intervals, which may lower the average price you pay per share over time.
A dividend reinvestment plan (DRIP) is a program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.
Generally speaking, enrolling your stocks in a dividend reinvestment plan, or DRIP, is a good move. Dividend reinvestment offers some big benefits. ... You typically don't pay any commissions for reinvesting your dividends. Plus, making the process automatic sets you up for maintenance-free compound returns.
Cash dividends are taxable, but they are subject to special tax rules, so tax rates may differ from your normal income tax rate. Reinvested dividends are subject to the same tax rules that apply to dividends you actually receive, so they are taxable unless you hold them in a tax-advantaged account.
But bottom line, reinvesting dividends through a broker or by signing up for DRIP plans directly through the dividend-paying companies, is a surprisingly powerful tool to passively improve your investment returns. So yes, DRIP plans are worth it, as long as they fit with your investing goals.
How Do Taxes Affect DRIP Investing. Even though investors do not receive a cash dividend from DRIPs, they are nevertheless subject to taxes, due to the fact that there was an actual cash dividend--albeit one that was reinvested. Consequently, it's considered to be income and is therefore taxable.
Whether you notice it or not, the dividends you're paid are often reinvested automatically for you, especially if you own mutual funds. ... Dividend reinvesting, sometimes done through dividend reinvestment plans, or DRIPs, can be a drain on your savings if you are not handling payouts the right way.
Company-operated DRIPS are popular with shareholders as a lower-cost option to accumulate additional shares. There are often no commissions or brokerage fees involved.
Use tax-shielded accounts. If you're saving money for retirement, and don't want to pay taxes on dividends, consider opening a Roth IRA. You contribute already-taxed money to a Roth IRA. Once the money is in there, you don't have to pay taxes as long as you take it out in accordance with the rules.
Dividend income is paid out of the profits of a corporation to the stockholders. It is considered income for that tax year rather than a capital gain. However, the U.S. federal government taxes qualified dividends as capital gains instead of income.
Warren Buffett Doesn't: Yes, you heard that right – Warren Buffett's investing strategy is all about dividends, but he doesn't reinvest them. Instead, he loves cash, and keeps the cash to follow his value investing strategy. There are sometimes when dividends don't matter, and a bad company may be one of these times.
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