Reinvesting your dividends helps you build a bigger nest egg.
Dividends can represent a significant portion of the return on the stocks you buy. Reinvesting those dividends into additional shares of the same stock helps you build a portfolio and increase your income. As an investor, you have a number of ways to invest in dividend-paying stocks and reinvest your dividends, including individual stocks and stock mutual funds.
Instructions
1. Contact the companies whose stocks you want to buy if you plan to invest in individual stocks. Many companies have dividend reinvestment plans that allow you to buy stocks directly from the company with no brokerage fess. You can acquire information about these plans by visiting the website for the investor relations department.
2. Establish a dividend reinvestment plan with the companies you plan to use. Submit your dividend reinvestment application and your initial deposit to the address listed on the form. Set up an automatic monthly transfer into the plan if you wish.
3. Contact several low-cost mutual funds if you prefer to use mutual funds instead. Mutual funds can give you wider diversification than you can get with individual stocks. You can concentrate on dividend stock funds if you want to maximize your dividend income. As an alternative, you can choose general stock funds and reinvest the dividends.
4. Compare the performance of each fund as well as the costs associated with each fund. Complete the application for the fund you want to buy. Mark the reinvest dividend option on the application to have the dividends reinvested automatically and used to buy additional shares of the fund.
5. Retain a copy of each mutual fund statement to determine how much you received in dividends and how many additional shares of the fund those dividends bought. The amount of the reinvested dividends should be added to your cost basis to avoid double taxation. You may want to keep a spreadsheet for each mutual fund you own and add the reinvested dividends to your cost basis each time you receive a new statement.
