Reinvesting dividends has been perceived as one of the best ways to build up your mutual fund and stock portfolio over time. If you plan to do it, you may want to consider these popular strategies to reinvest dividends.
Dividend reinvestment plans (DRIPs)
Automatic DRIPs are one of the most straightforward and simplest ways to reinvest your dividend. You can issue your plan through your broker or by yourself. By automatic DRIPs, every time the dividends are paid, they will directly be used to purchase more shares.
Some of the existing plans and funds allow you to reinvest for frictional shares, while some others only let you buy the whole shares.
But, you have to remember that setting up a DRIP through a brokerage will cost you the commission. On the other hand, directly hold your shares with the company is free.
Reinvest by timing the market
Some investors usually deposit their dividend payments into their brokerage accounts. They wait until the cash accumulated, then use it to buy more shares of the dividend-paying item or other securities that are trading at low.
They can reach a superior cost basis if they buy at a low market. The other way to use this strategy is you have to wait until the market becomes undervalued to reinvest the dividends.
However, some other investors say that keeping the cash that long can be counterproductive. That cash can generate bigger dividends if it reinvested immediately.
Buying an index fund
The other strategy you can consider is to buy an index fund. The biggest disadvantage of an index fund is most of them do not bring dividends to the investors.
However, if you like an index fund and like to get dividend income from an ETF portfolio, you can choose this strategy. This way, you can also gain significant returns over time.
