Reinvest dividends for long-term growth

When you own shares in a stock, exchange-traded fund (ETF), or mutual fund, you might receive payments such as dividends and capital gains distributions. And when you choose to reinvest dividends and other payments, it can help add to your investment's growth. This occurs through compounding, where your earnings generate additional earnings.

Points to know

• Choosing to reinvest dividends allows you to automatically purchase additional shares of the same security when you receive dividends or other payments. This can help grow your investment over time.
• Dividend payments in nonretirement accounts are taxed regardless of whether you reinvest or take them in cash.
• If you're in or near retirement, or if you need to rebalance your portfolio, it might make more sense to take your dividends in cash.

How dividend reinvestment works

As an investor, you can opt to receive your dividends in cash—such as through a transfer to a settlement fund or bank account—or reinvest them. If you choose to reinvest dividends, any dividends you receive will be used to buy additional shares of the same investment. This can also apply to other payments, like capital gains distributions, which you might receive for owning shares in a fund. Depending on the amount of the payment, your reinvestment may include the purchase of whole shares, fractional shares, or a combination of both.

What are dividend reinvestment plans?

A dividend reinvestment plan (DRIP) simplifies the reinvestment process by automatically using your dividends to purchase additional shares of the same security. DRIPs are offered by most fund issuers and brokerage platforms, as well as many individual companies. While reinvestment is an option for most stocks, mutual funds, and ETFs, it's important to note that not all investments make dividend or capital gains payments, and not all holdings are eligible for reinvestment.

The Vanguard Brokerage dividend reinvestment program

The Vanguard Brokerage dividend reinvestment program is a no-fee, no-commission option that allows you to reinvest dividend and capital gains payments from eligible securities into additional shares of the investment that's making the payment.

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

Get details of our dividend reinvestment program

To view eligible election choices for positions in your account, log in to your Vanguard account and follow the steps below.

1. Select the Profile icon.
2. Choose Profile & account settings (or Account preferences on the mobile app).
3. Select Holding level dividend & capital gains elections.

Benefits of reinvesting dividends

Reinvesting dividends comes with several benefits that can help you save time, simplify investing, reduce costs, and accelerate portfolio growth.

• Compounding. Compounding through reinvestment, or "earnings on earnings," involves using dividends to buy additional shares, which can then generate their own dividends. That means if a company declares a future dividend, as an owner, you'll receive dividend payments on both your original shares and those acquired through reinvestment, helping your portfolio grow over time.
• Dollar-cost averaging. This popular investing strategy involves reinvesting dividends to buy additional shares on a regular schedule, regardless of the current price. It can help average out how much you pay for your shares over time and avoid the risk of investing a lump sum when prices could be at their peak.
• Automatic investing. When you elect to reinvest dividends and capital gains, these payments automatically purchase additional shares, saving you time.
• Potential savings. Reinvested dividends are typically commission-free.

Are reinvested dividends taxable?

Taxes on reinvested dividends depend on the type of investment and account.

In a nonretirement brokerage account, most dividends are considered taxable income in the year they’re paid, whether you reinvest them or take them as cash. However, there are exceptions, such as dividends from regulated investment companies (e.g., mutual funds) paid in January but declared in October, November, or December of the prior year. In this case, dividends may be taxable in the year they're declared.

In a retirement account, reinvested dividends aren't taxed separately. For example, if you have a Roth IRA, reinvested dividends grow tax-free and can be withdrawn tax-free if certain conditions are met.¹ On the other hand, reinvested dividends in a traditional IRA or 401(k) grow tax-deferred but are subject to regular income taxes when withdrawn.

The amount of tax you pay on reinvested dividends also depends on whether the dividends are qualified or nonqualified, as well as your individual tax rate. Qualified dividends meet specific IRS criteria—including a minimum holding period—and are taxed at the more favorable long-term capital gains tax rates ranging from 0% to 20%. Nonqualified dividends are taxed at your ordinary income tax rate.

Another consideration when you reinvest dividends and capital gains is cost basis—the price you paid for the shares you own. Every time you reinvest, your cost basis is adjusted to reflect the purchase of additional shares, which could change the amount you eventually pay in taxes when you sell.

Important dividend dates to know

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.

These dates determine which investors are eligible to receive dividends and help companies ensure they only pay dividends to investors who actually own shares of the company's stock, mutual fund, or ETF.

While it might seem like a good idea to purchase stock just before the ex-dividend date to capture the dividend payment, there are 2 main reasons to avoid "buying the dividend." First, the share price of a security typically declines by the amount of the dividend on the ex-dividend date (not including any market fluctuations). So, if you buy a stock for $50 and receive a $2 dividend, the market value of the stock will likely drop to around $48 on the ex-dividend date. Second, you may have to pay a commission or other fees to buy the shares, and you'll owe taxes on any dividends you receive.

Risks and considerations of dividend reinvestment

Reinvesting dividends is a simple way to grow your investments. However, it also comes with certain risks and considerations, including:

• Market risk. When you reinvest dividends, you buy more shares of an investment at the current market price. And like any investment, the value of those shares could decline.
• Dividend cuts. While many companies pay dividends on a regular basis, there's no guarantee they'll continue to do so in the future. Since companies aren't obligated to pay dividends to shareholders, there's a chance they could reduce or even eliminate dividend payments at any time.
• Concentration risk. By reinvesting dividends, you'll continue to increase the size of your position in the same security. Over time, this could mean a larger percentage of your investment portfolio is concentrated in a single stock, fund, or other security. As a result, you might end up with less diversification and more risk of exposure.

When reinvesting may not make sense

Reinvesting dividends is often a smart strategy for long-term investors, but there are certain situations where you might prefer to take your dividend in cash.

• When you're in or near retirement. If you're relying on investment income to cover expenses in retirement, taking your dividends as cash may help provide a steady income stream.
• When you need to rebalance. If your asset allocation has shifted from your preferred mix, you can take your dividend in cash and use it to buy more of a different type of asset in your portfolio.
• When you receive dividends in a taxable account. Since dividend payments in a taxable account are typically taxed in the year they're paid—even if you reinvest them—you may want to use your dividend proceeds to cover your tax bill or other expenses.

Frequently asked questions about reinvesting dividends