Is better to take the dividend or reinvest it when owning stocks?
That was the question a reader posed to Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners, discusses in this Retirement Daily video.
And the answer has changed over time. A few years ago it was advantageous to reinvest the dividends. After all, there was no commission to reinvest the dividends.
But today you have choices. You could reinvest the dividend if, for instance, you continue to like the company in which you own shares.
But there's another option available now. Today, many brokerage firms offer commission-free trading. "That's a real benefit that was previously only available by reinvesting those dividends," said Levine.
Now, you can take the dividend and buy shares in other companies or even buy fractional shares in other companies, as a way to increase your portfolio's diversification, said Levine.
Levine's bottom line: If you don't need the cash, and you don't need to further diversify your portfolio, consider signing up for the dividend reinvestment option, "It just makes things seamless," he said. "One of the biggest issues with getting people to make good financial decisions is friction... the lower the barrier to getting something done, the more likely it will be."
Two things to consider:
One, the tax rate on qualified dividends is 0%, 15%, or 20%, depending on your taxable income and filing status.
And two, reinvesting dividends does increase the cost basis of your holding.