Dividends: Reinvest or take the cash?

When a company makes a profit, it has several options on how to use that money.

It can either reinvest funds back into the business, issue a dividend to shareholders, buy back some shares or a combination of the three.

Read on to find out what you need to know about dividends.

What are dividends?

When a company issues a dividend, it's essentially sharing its profits with its shareholders. This can be in the form of cash, additional shares, or a mix of both.

There is no certainty that a company will pay a dividend or that it will rise in the future. But some companies have a better track record than others in either paying a dividend or increasing the payment over time.

What is a Dividend Reinvestment Plan (DRP)?

Some companies allow investors to participate in a Dividend Reinvestment Plan (DRP). Under a DRP, the dividend proceeds will automatically be used to purchase additional shares on your behalf.

Essentially, it's like using your dividends to buy more shares of the company.

Benefits – tell me the good stuff

• This purchase is generally done without incurring a transaction cost (brokerage).
• The new shares are bought on your behalf automatically, which means one less thing on your to-do list.
• While it may be tempting to take the dividend in cash, reinvesting dividends could lead to significant long-term growth. Through the power of compounding, reinvested dividends can generate additional returns over time, potentially leading to a larger investment portfolio over the long term.

Tax Considerations

There may be tax implications with dividend reinvestment plans. You should speak to a tax professional for more information. You may also find the ATO website and its case studies helpful.

How to set up a Dividend Reinvestment Plan

This is usually done via the relevant share registry. The share registry’s name and contact details can be found on your most recent dividend or holding statements. Alternatively, these details can also be located by logging in to the CommSec website, looking up the company in the search box and clicking on the ‘About’ tab.

What to Remember

Deciding whether to reinvest dividends or take them in cash is an important decision for you to make as an investor.  Remember to always bring your approach back to your investment goals, this will help determine the best approach for you.