With dividend reinvestment, the cash from a dividend is used to buy more shares instead of being paid out. Over time those extra shares pay dividends of their own. It is simple in principle and easy to lose track of in practice.
A worked example
Made-up numbers: you own 100 shares priced at $50. The company pays $1.00 per share each quarter.
| Quarter | Shares at start | Dividend | New shares bought | Shares at end |
|---|---|---|---|---|
| 1 | 100.00 | $100.00 | 2.00 | 102.00 |
| 2 | 102.00 | $102.00 | 2.04 | 104.04 |
| 3 | 104.04 | $104.04 | 2.08 | 106.12 |
| 4 | 106.12 | $106.12 | 2.12 | 108.24 |
That assumes the price stays at $50 and the dividend stays at $1.00. In a year the share count grows by about 8%, with no new money from you. In real life the price moves, so you buy more shares when it is low and fewer when it is high.
Fractional versus whole shares
- Fractional shares: every dollar is reinvested, which gives the smoothest compounding. Not every broker offers it.
- Whole shares only: the leftover cash stays in the account until there is enough for another share.
- Cash (no reinvestment): the dividend is paid out and you decide what to do with it.
Things to know
- Reinvesting is still a dividend. The payment counts as income received even though you got shares and not cash, so record it as both a dividend and a purchase.
- Each reinvestment changes your cost per share. Your average cost needs to include every reinvested purchase.
- It increases concentration. Reinvesting into the same holding makes it a bigger share of your portfolio over time.
- It is automatic. That is the benefit and the risk. Check periodically that you still want the money going into that holding.
Tracking reinvested dividends
Each reinvestment is two events: a dividend received and a purchase of new shares. Miss the purchase and your share count and cost are wrong. In Nimblewit you choose cash, fractional or whole-share reinvestment for each holding, and reinvested shares carry into the next payment in the expected income calendar.
To see how reinvesting could compound over many years with your own yield, dividend growth and monthly additions, try the free dividend calculator with DRIP.