Have you ever wondered what to do with those dividend payments from your investments? Instead of just letting the money accumulate in your account or using it for other purposes, you have the option to reinvest those dividends. This allows you to put that money right back into buying more shares of stocks or mutual funds you already own. It’s a simple process that can really add up over time through the power of compounding. This guide will walk you through everything you need to know about reinvesting dividends with Fidelity.
How Dividends Work
Before we dive into the specifics, let’s review what exactly dividends are. Dividends are regular payments that many publicly traded companies make to shareholders as a way of sharing their profits. There are a few main types:
- Cash dividends – This is the most common kind. Companies pay out a chosen amount per share owned on a quarterly or annual basis.
- Stock dividends – Instead of cash, companies grant shareholders additional shares in the company itself.
- Dividend reinvestment plans (DRIPs) – These allow shareholders to automatically use dividend payments to buy more stock shares, often at a discount.
- Special dividends – These are one-time, larger-than-normal dividend payments companies sometimes make if profits are especially high.
- Preferred dividends – Issued to owners of preferred shares of stock, which are more similar to bonds than common shares. Amounts are generally fixed.
Now why would a company decide to pay out part of its profits in dividends? Two main reasons – to reward/attract investors and to show financial strength. Mature, established companies tend to pay dividends more consistently than high-growth companies that pour most profits back into expansion.
One last key thing to know is that all types of dividends get taxed, either at capital gains rates (for “qualified” dividends) or ordinary income rates. So make sure to factor that in.
Benefits of Reinvesting Dividends
Okay, so onto the good stuff – why put those dividend payments right back into buying more investments? There are some major advantages:
Power of compounding – Reinvesting dividends allows you to accumulate more shares. And over time, earning dividends on those additional shares really starts to snowball. $100 invested at a 4% yield for 10 years while reinvesting dividends results in $148 total.
Automation – Once you set up reinvestment, dividends will automatically use to purchase more shares without any additional effort on your part. It becomes a seamless, set-it-and-forget-it process.
Growth – Reinvested dividends drive portfolio growth through compounding much faster than just spending dividends or leaving them in cash. Those shares keep working for you.
Dollar cost averaging – Using small, consistent sums from dividends allows you to smoothly dollar cost average into positions over time vs in chunks. This helps manage volatility.
Step-By-Step Guide for Reinvesting with Fidelity
Ready to start reinvesting your dividends? Here is an easy step-by-step walkthrough for how to set it up with Fidelity:
First, log into your Fidelity account online and navigate to the Dividends & Capital Gains page. This shows you all holdings currently paying dividends or distributing capital gains.
Next, scan through and find the specific security (stock, ETF, etc) or mutual fund you want to update. Click on the “Update” link in the action column for that investment.
This will bring you to the Update Distributions page. For mutual funds, you’ll see separate options for dividends and capital gains. For individual stocks/ETFs, they’re bundled together.
Choose the “Reinvest” option and decide if you want changes applied only to existing shares or both existing and future purchases.
That’s it! Fidelity will display a confirmation screen and also send email or mail notifications so you know it was properly set up.
Reinvesting IRA Distributions
The process works much the same way for reinvesting dividends in IRAs or other registered accounts. Just a couple special notes:
- You can reinvest IRA mutual fund capital gains and dividends back into the same fund or direct to other Fidelity funds.
- Certain account types like IRA-BDAs and PAS accounts require contacting Fidelity directly to update dividend reinvestment instructions.
And as always, be mindful of annual contribution limits when reinvesting IRA dividends to ensure you don’t overcontribute.
Best Practices for Reinvesting
Want to make the most of reinvesting your dividends? Here are some pro tips:
Pick stocks with solid dividend history – Seek out “dividend aristocrats” with 25+ years of rising dividends or companies likely to maintain reliable dividends.
Consider funds – Dividend ETFs and mutual funds offer instant diversification and take the research legwork out of dividend investing.
Mind the dates – Know ex-dividend dates so you can adjust holdings if needed to receive upcoming dividend payments.
Manage volatility – Reinvested dividends help cushion volatility, but higher-yield stocks and funds can still see bigger swings.
Use DRIPs – Enrolling in companies’ dividend reinvestment plans means any stock dividends go straight back into buying more shares without fees.
Should I Reinvest Dividends or Treat Them as Expenses?
Other Reinvestment Options
Beyond individual securities, Fidelity offers a few other paths for keeping your money working overtime through auto-reinvestment:
Dividend mutual funds – Set up monthly automatic investments into Fidelity dividend funds to keep expanding your holdings.
Bonds/CDs – Reinvest interest payments from bonds and CDs to accelerate earning potential.
High yield savings – Interest compounds daily in accounts like Fidelity’s CMA to drive faster growth on your cash.
Start Reinvesting Your Dividends
As you can see, automatically reinvesting dividends with Fidelity takes just minutes to set up but delivers major advantages that compound over time. So why wait? Log into your account today to get your dividend reinvestment instructions squared away! Committing to reinvesting now makes it that much easier to stick with as those dividend payments start rolling in month after month or quarter after quarter down the road.
Here’s to many happy years of accumulating shares and watching your portfolio grow!