Hey there! Looking to put your dividend payments to work and maximize your investment growth? Dividend reinvestment, also known as a DRIP, can be a powerful strategy. Instead of receiving dividend cash payments that sit in your account, you can automatically reinvest those dividends to buy more shares – boosting your ownership stake in dividend stocks and funds over time.
Setting up dividend reinvestment is easy with Fidelity. In this guide, I’ll walk you through exactly how DRIPs work, the specific steps to enable automatic reinvestment within your Fidelity accounts, and some best practices to make the most of dividend compounding. Buckle up, because reinvesting your dividends can significantly amplify your long term returns!
How Dividend Reinvestment Works
Before diving into the specifics, let’s first cover the basics of how dividend reinvestment plans boost your investment growth.
When you own stocks or mutual funds that pay dividends, you’re distributed cash payments usually on a quarterly basis. Now you could take those dividend payments as income, or direct the cash into other investments. But reinvesting dividends automatically uses your payments to buy more shares of that same security.
For example, if you own 100 shares of Stock ABC trading at $50/share, and the company pays a $1 per share dividend, you’d receive $100 in dividend income. With dividend reinvestment enabled, that $100 would instead purchase 2 additional shares of ABC stock.
By continually plowing dividends back into buying more shares, dividend reinvestment compounds your ownership – and paves the way for exponential growth. Imagine reinvesting dividends from your initial 100 shares into fractional share purchases over 10 or 20 years. Your share balance and dividend payments would snowball over time!
Now this does have tax considerations, since dividend reinvestment defers taxes owed on the dividend income. But the benefit of compounding and deferred tax liability often outweighs the cost of immediate taxation for long term investors. Just something to be aware of!
Alright, now that you know the basics of how dividend reinvestment works, let’s look at actually setting up DRIPs with Fidelity…
Setting Up Dividend Reinvestment with Fidelity
Enabling automated dividend reinvestment with Fidelity only takes a few minutes online. You can customize reinvestment on a per security basis across your different accounts.
Here are the steps to reinvest dividends and capital gains distributions within your Fidelity brokerage, IRA, or other investment accounts:
- Log into your account on Fidelity.com and navigate to the “Accounts & Trade” menu. Select “Account Features” followed by “Brokerage & Trading”.
- Click on the “Dividends & Capital Gains” link.
- On the summary page, find the stock, ETF, or mutual fund you want to update. Click “Update” in the Action column.
- On the update page, you can now select how dividends and capital gains are handled. For stocks, dividends and capital gains will be grouped together. For mutual funds, you can specify reinvestment behavior for dividends separate from capital gains.
- Choose whether you want this reinvestment selection to apply to just current shares, or also extend to future purchases of this security.
- Confirm your update. Fidelity will provide a confirmation message and your selection will be immediately effective!
It’s that simple to start putting your dividends to work. Now let’s go a bit deeper on reinvestment options for stocks vs. mutual funds…
Reinvestment Options for Stocks and Mutual Funds
While the steps are straightforward, there are some specifics to understand when reinvesting dividends from stocks compared to mutual funds.
For individual stocks and ETFs, dividend and capital gains distributions are bundled together into a single reinvestment selection. Options typically include reinvesting into more shares of that security, depositing payments into your core account cash, or directing payments into other Fidelity mutual fund accounts.
Mutual funds offer more granular control, with the ability to set up different reinvestment behaviors for dividend income vs. capital gains. For each distribution type, you can reinvest back into the fund, direct payments into your Fidelity mutual fund core account, or send payments into any other Fidelity mutual fund.
One advantage of mutual fund dividend reinvestment is the ability to redirect dividends from one fund into purchasing shares of other Fidelity funds. This lets you strategically shift dividend income between different assets classes or fund categories over time.
However, there are some restrictions. Certain Fidelity money market and short-term investment funds require dividend and capital gain payments to be deposited as cash into your core account. Check requirements for each individual mutual fund before setting up reinvestment.
Capital Gains Distributions with Fidelity
In addition to regular dividend payments from stocks and funds, you may occasionally receive larger capital gains distributions.
Capital gains represent profits earned when the underlying securities within a fund or ETF are sold internally by the manager. These are distributed to shareholders as required and can be reinvested or paid out.
For mutual funds, you can opt to reinvest capital gains distributions while taking regular dividends as cash, or vice versa. Make sure to evaluate the tax implications when considering capital gains reinvestment. Unlike dividends which are taxed as ordinary income, reinvested capital gains grow tax-deferred but are taxed at the more favorable long term capital gains rate when shares are eventually sold.
Best Practices for Dividend Reinvestment
Now that you know how to set up dividend reinvestment with Fidelity, let’s discuss some smart strategies to maximize the benefits of DRIPs.
- Don’t blindly reinvest every dividend. Be selective in choosing securities where you want to reinvest distributions. Focus on high quality companies you want greater exposure to.
- Factor in your income needs. If relying on dividends for current income, strike a balance between reinvestment and payouts.
- Consider tax implications. Reinvestment in tax-advantaged retirement accounts like IRAs avoids taxable events.
- Customize reinvestment regularly. Reevaluate your choices periodically based on life changes and portfolio needs.
- Utilize fractional shares. One of the biggest benefits of automatic DRIPs is the ability to steadily accumulate fractional share interests through reinvestment.
- Let time work its magic. Give the power of compounding years to grow your reinvested dividends into exponential returns.
The key is optimizing reinvestment for your specific financial situation and investment goals.
The ability to seamlessly reinvest dividends with your Fidelity investment account can substantially grow your portfolio over the long run. Make your money work harder by putting cash distributions back into buying more shares automatically. Use the steps provided to customize dividend and capital gains reinvestment for your particular holdings and needs. Reinvesting consistently over time taps into the incredible power of compound interest – letting your dividends earn even more dividends down the road!