Investing in dividend-paying stocks can be a great way to generate passive income, but it’s equally important to consider what to do with those dividends once they’re paid out. Many investors choose to reinvest their dividends, allowing them to take advantage of the power of compounding and potentially increasing their returns over time. For investors who use Fidelity as their brokerage firm, reinvesting dividends is a straightforward process that can be completed online or over the phone. In this article, we’ll explore the benefits of reinvesting dividends and provide a step-by-step guide on how to do so through Fidelity.
Benefits of Reinvesting Dividends
Reinvesting dividends can be a highly effective way to grow your investment portfolio, as it allows you to take advantage of the power of compounding. When you reinvest your dividends, you’re essentially using the dividend payments to purchase additional shares of the same stock, which can lead to a snowball effect over time. This can be particularly beneficial for long-term investors, as it allows them to ride out market fluctuations and potentially increase their returns over the long haul. Some of the key benefits of reinvesting dividends include:
Key Benefits of Reinvesting Dividends
The following are some of the key benefits of reinvesting dividends:
- Increased returns: Reinvesting dividends can help to increase your returns over time, as the dividend payments are used to purchase additional shares of the same stock.
- Reduced cash drag: When you reinvest your dividends, you’re putting the money back to work in the market, rather than leaving it to sit in cash. This can help to reduce cash drag and keep your portfolio growing.
- Convenience: Reinvesting dividends is often an automated process, which means you don’t have to lift a finger to take advantage of the benefits. Many brokerage firms, including Fidelity, offer automatic dividend reinvestment plans that can be set up online or over the phone.
- Tax efficiency: Reinvesting dividends can also be a tax-efficient way to grow your portfolio, as you won’t have to pay taxes on the dividend payments until you sell the shares.
How to Reinvest Dividends in Fidelity
Reinvesting dividends in Fidelity is a straightforward process that can be completed online or over the phone. To get started, you’ll need to log in to your Fidelity account and navigate to the “Accounts & Trade” tab. From there, you can follow these steps:
Step-by-Step Guide to Reinvesting Dividends in Fidelity
The following are the steps to reinvest dividends in Fidelity:
- Log in to your Fidelity account: Go to the Fidelity website and log in to your account using your username and password.
- Navigate to the “Accounts & Trade” tab: Once you’re logged in, click on the “Accounts & Trade” tab at the top of the page.
- Click on “Account Settings”: From the “Accounts & Trade” tab, click on “Account Settings” and then select “Dividend Reinvestment” from the drop-down menu.
- Choose your reinvestment option: You’ll be given the option to reinvest dividends for all of your eligible accounts, or to select specific accounts to reinvest. Choose the option that works best for you.
- Confirm your changes: Once you’ve selected your reinvestment option, click “Save Changes” to confirm. Your dividends will now be automatically reinvested in the future.
Types of Dividend Reinvestment Plans
Fidelity offers a few different types of dividend reinvestment plans, each with its own unique benefits and drawbacks. Some of the most common types of plans include:
Common Types of Dividend Reinvestment Plans
The following are some of the most common types of dividend reinvestment plans:
- Automatic dividend reinvestment plan: This type of plan automatically reinvests dividend payments into additional shares of the same stock.
- Partial dividend reinvestment plan: This type of plan allows you to reinvest a portion of your dividend payments, while taking the rest in cash.
- Custom dividend reinvestment plan: This type of plan allows you to customize your dividend reinvestment options, choosing which stocks to reinvest and which to take in cash.
Conclusion
Reinvesting dividends can be a powerful way to grow your investment portfolio, and Fidelity makes it easy to do so. By following the steps outlined in this article, you can set up a dividend reinvestment plan that works for you and takes advantage of the benefits of compounding. Whether you’re a seasoned investor or just starting out, reinvesting dividends can be a great way to generate passive income and build wealth over time. So why not get started today and see the benefits of reinvesting dividends for yourself?
