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Investing strategies

Keep your dividends working for you

Stretch the power of your invested dollars by reinvesting dividends in additional shares of the security that issued them.
3 minute read

Points to know

  • Reinvesting dividends is another way to make investing automatic and add to your investment's growth.
  • Take advantage of Vanguard's dividend reinvestment program, which has no fees or commissions.
  • Understand the importance of the record date and ex-dividend date.

Share

A single unit of ownership in a mutual fund or an exchange-traded fund (ETF) or, for stocks, a corporation.

Dividend

The distribution of the interest or income produced by a fund's holdings to its shareholders, or a payment of cash or stock from a company's earnings to each stockholder.

Settlement fund

This holds the money you use to buy securities, as well as the proceeds whenever you sell.

Compounding

When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In this example, you'd earn over $1,600 in the 30th year. 

Choose to reinvest

When you buy shares of a security, you'll be asked whether you want any dividends transferred to your settlement fund or reinvested in more shares.

Select Reinvest to buy additional shares. For long-term investors, reinvesting dividends has several benefits:

  • You don't have to think about investing. It's automatic.
  • You're buying at various prices, averaging out the price per share over the long term.
  • You're compounding your investment's growth by continually adding more shares which, in turn, will generate dividends of their own.

Capital gain/loss

The difference between the sale price of an asset (such as a mutual fund, stock, or bond) and the original cost of the asset. A capital gain/loss is "unrealized" until the investment is sold, when it becomes a realized gain/loss. Realized gains are taxable and they may be considered short-term (if the investment was owned one year or less) or long-term (if the investment was owned for more than one year).

Stock

An investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.

ETF (exchange-traded fund)

A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.

Mutual fund

A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

Closed-end mutual fund

A publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed, and traded like a stock on a stock exchange.

The Vanguard Brokerage dividend reinvestment program

This no-fee, no-commission program allows you to reinvest dividend and capital gains distributions into additional shares of the investment that's making the distribution.

Investments include eligible stocks, closed-end mutual funds, ETFs (exchange-traded funds), funds from other companies, and Vanguard mutual funds held in your Vanguard Brokerage Account.

Get details of our dividend reinvestment program

Record date

The date set by a company to determine the shareholders who will receive the next distribution of dividends or capital gains of the company's security.

Ex-dividend date

The date when a company deducts the distribution of dividends and/or capital gains from the share price of a mutual fund or stock, and the security begins trading without the distribution. The share price drops by the amount of the distribution (plus or minus any market activity).

Important dates

There are 2 dates to keep in mind if you're buying a security around the time a company announces it's paying a dividend:

  • Record date: You must be a shareholder on the record date set by the company to receive a dividend.
  • Ex-dividend date: In addition, you must complete your purchase before the ex-dividend date to receive a dividend.

Companies set these dates to make sure they pay dividends to investors who actually own shares of the company's stock.

Find out why you should avoid buying the dividend

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