Should you reinvest your dividends? DRIP explained
When a fund pays you a dividend, you have a choice. Take it as cash, or use it to buy more shares. Reinvesting is called DRIP, and over time it can make a huge difference.
Key points
- Reinvested dividends buy more shares, which pay more dividends.
- In our example, reinvesting grows the account by about $270,000 more over 30 years.
- Most brokers let you turn on DRIP for free.
How DRIP works
Say you own 100 shares and the fund pays $1 per share. You get $100. With DRIP on, that $100 buys more shares right away. Next time, you get dividends on more shares. It's compound growth in action.
An example
You start with $10,000 and add $300 a month for 30 years. The fund grows 8% a year in price and pays a 2% dividend:
| Choice | Account value | Cash you received |
|---|---|---|
| Reinvest dividends | $793,347 | $0 |
| Take dividends as cash | $523,192 | $104,011 |
Taking cash gave you about $104,000 to spend over 30 years. Reinvesting gave you about $270,000 more in your account. That's the power of letting dividends compound.
Example rates only. Real results vary.
When to reinvest
- You're still working and building your savings.
- You don't need the cash to pay bills.
- You want the simplest "set it and forget it" plan.
When to take cash
- You're retired and living on the income.
- You want to send dividends to a different fund to rebalance.
- You're building up cash for a known expense.
Taxes on dividends
In a regular brokerage account, dividends are taxed in the year you get them, even if you reinvest them. Many dividends are "qualified" and taxed at lower rates, sometimes 0% for lower incomes. Inside a 401(k), IRA or Roth, you don't pay tax on dividends each year.
How to turn on DRIP
Log in to your broker and look for "dividend reinvestment" in your account or position settings. Most brokers offer it free and can buy fractional shares, so every cent gets invested.
Flip the DRIP switch and watch the difference on your own numbers.
Open the calculatorQuick answers
Is it better to reinvest dividends or take cash?
If you don't need the money, reinvesting usually grows your account much more over time. Retirees often take the cash to live on.
Do I pay tax on reinvested dividends?
Yes, in a regular brokerage account. Not inside a 401(k), IRA or Roth.
Does DRIP cost money?
Most major brokers offer dividend reinvestment for free.
Can I turn DRIP off later?
Yes. You can switch it on or off any time in your account settings.
Sources
Keep learning
This article is for learning only. It is not financial, tax or legal advice. Example returns are not promises. Talk to a licensed professional about your own situation.