Reduced cashflows for free#

What this means is, every reinvested dividend must be calculated in Canadian dollars. If you own assets other than Canadian stocks in a taxable account, and you reinvest those dividends, things get more complex because for tax filing purposes your adjusted cost base (ACB for short), must be reported in Canadian dollars. If you have reinvested dividends, your adjusted cost base is more complicated because you must factor in the amount reinvested over time, as in every month or quarter. When that sale is triggered, you could have a capital gain or a capital loss. When you buy an investment in a non-registered/taxable account, the eventual sale proceeds need to be reported on your tax return. The biggest one is the need to calculate your adjusted cost base – if you are investing in a taxable account. Yes, so it’s worth mentioning the other side of the story. Are there drawbacks to reinvesting dividends?

Reduced cashflows for free#

In summary, we can take advantage of the power of compounding, we can better manage our investing behaviour, and we can do that all for free by automatically reinvesting our dividends. In that, it costs nothing to automatically reinvest our dividends. So, a HUGE advantage of reinvesting our dividends is to reduce commission fees. Dividend reinvestments are free!Īs Do-It-Yourself investors at Cashflows & Portfolios, we know that buying (or selling) stocks or ETFs often comes at a cost – with commission fees paid to the brokerage we use. When markets go up, you get the share price appreciation on the ride back up. That’s because when markets go down, you are reinvesting your dividends at lower stock prices. Given bad investing behaviour such as trading or thinking you can time the market is usually detrimental to your portfolio value, then automatically reinvesting dividends into more shares of a security can help you curb any bad behaviour and even more so, reward you with time. Once you establish your reinvestment plan with your discount brokerage, usually as easy as a phone call to your brokerage, you can then reinvest all dividends paid cash dividends are automatically invested by your brokerage into a stock (or ETF) you liked enough to buy and hold in the first place. Dividend reinvestments can be automaticĪnother benefit of reinvesting your dividends is it can be automatic. Money that makes money, can make more money over time. Reinvested dividends not only delivered a greater annualized return, in terms of real money you can actually spend, it added almost $40,000 to your bank account by you doing nothing but reinvesting your dividends. Say also you buy and hold this stock for 30 years since you know from Cashflows & Portfolios that compounding is important – you’re just not sure how important. You will also get some annual price appreciation as well, say 4%. The annual dividend growth rate for the stock, however, is 5%, which is not uncommon. So, the dividend yield is about 3% (annual dividend/share price). The magic of compounding is one of the definite pros of dividend reinvestment.įor example, say you own $10,000 in stock.

Reinvesting dividends can help your money make more money That’s because reinvesting dividends can take advantage of compounding. While there is no magic in the power of dividend investing, it can be a very powerful investing approach all the same.

You may believe that getting paid to be a shareholder, via dividends, is some key to the holy grail of investing. It will help you understand if dividend investing is right for you! Why reinvest dividends? If you want to read more about the pros and cons of dividend investing, definitely check out our detailed post on this subject. Shareholder value is created in many ways! That may or may not appeal to all investors. In other words, retained earnings and cash are reduced by the total value of the dividend. It’s important to note when dividends are paid, the effect on the balance sheet is a decrease in the company’s retained earnings and its cash balance.

When you own dividend-paying stocks, and those companies pay out dividends to you as a shareholder, you are essentially receiving some of its retained earnings that a company has already created through its cash flow and profit-making activities. While there are different types of dividends per se (cash dividends, which are cash payments to shareholders) and stock dividends (a percentage increase in the number of shares owned), when we write about dividend investing here at Cashflows & Portfolios, we are focusing on the cash dividends since that’s how most corporations in Canada reward shareholders.