3 Times to Stop Dividend Reinvestment (2024)

FAQs

Can you stop dividend reinvestment? ›

If you own a fund or exchange-traded fund, your brokerage account settings should include a choice to reinvest dividends or not, which can be done at the fund or account level.

Reinvested dividends may be treated in different ways, however. Qualified dividends get taxed as capital gains, while non-qualified dividends get taxed as ordinary income. You can avoid paying taxes on reinvested dividends in the year you earn them by holding dividend stocks in a tax-deferred retirement plan.

Cons. You'll Limit Your Asset Diversification: Reinvesting your dividends in a company you already own shares of can result in an unbalanced portfolio. You Could Still Owe Taxes: It's important to note that dividends are taxed whether you take a cash payout or reinvest them.

Given that much higher return potential, investors should consider automatically reinvesting all their dividends unless: They need the money to cover expenses. They specifically plan to use the money to make other investments, such as by allocating the payments from income stocks to buy growth stocks.

Can I change my dividend reinvestment or NAV distribution reinvestment setting? Yes. You can enable or disable dividend reinvestment and/or NAV distribution reinvestment at any time from the settings section of your account under “Reinvestment”.

Once you own an equity that pays dividends, you can adjust whether or not you'd like to reinvest those dividends at any time.

You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.

Dividends are taxable regardless of whether you take them in cash or reinvest them in the mutual fund that pays them out.

Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.

Dividend reinvestment is almost always a good choice if the underlying asset continues to perform well and you've built a significant quantity of wealth. You will be easily able to leave a large amount of money to your family when you die if and only your cards are dealt correctly.

Why do companies pay dividends instead of reinvesting? ›

Paying dividends sends a clear, powerful message about a company's future prospects and performance, and its willingness and ability to pay steady dividends over time provides a solid demonstration of financial strength.

There are times when it makes better sense to take the cash instead of reinvesting dividends. These include when you are at or close to retirement and you need the money; when the stock or fund isn't performing well; when you want to diversify your portfolio; and when reinvesting unbalances your portfolio.

You can put reinvestment plans on pause if you need the cash or discontinue them entirely. Or if you're using a DRIP, you can make full or partial reinvestments. You can also pile up cash in your brokerage account and reinvest it yourself if you prefer.

When you don't reinvest your dividends, you increase your annual cash income, which can significantly change your lifestyle and choices. For example, suppose you invested $10,000 in shares of XYZ Company, a stable, mature company, back in 2000. That allowed you to buy 131 shares of stock at $76.50 per share.

If you reinvest dividends, you buy additional shares with the dividend rather than take the cash. Dividend reinvestment can be a good strategy because it is: Cheap: Reinvestment is automatic—you won't owe any commissions or other brokerage fees when you buy more shares.

A dividend reinvestment plan, or DRIP, automatically uses the proceeds generated from dividend stocks to purchase more shares of the company. This strategy allows investors to compound their returns over time by accumulating more shares, which themselves pay dividends that will be reinvested.

You can modify or cancel any or all of your reinvestment instructions online at vanguard.com under the “My Accounts, Account Information, Profile & Settings” link.

If you're primarily concerned with paying monthly expenses or reducing high-interest debt, taking dividends in cash may be the right decision. Drawing income directly from investments can provide you with a supplemental source of cash flow if you're retired or other income sources are insufficient to meet expenses.