Investing is all about making your money work for you, and one of the most powerful tools available to investors is dividend reinvestment. But should you reinvest your dividends ? And if so, how do you go about it?
In this Get Rich Slow Club episode, Tash and Ana explore the pros and cons, and go through the basic steps of setting up a dividend reinvestment plan (DRP, which we'll discuss later).
What are dividends?
Ana kicks off by explaining what dividends are .
"Dividends are essentially a portion of a company's profits distributed to its shareholders," she says. "This is an income paid to the shareholder, meaning that you will be taxed on this income."
If you own shares in a company or an exchange-traded fund (ETF) that pays dividends , you’ll receive a cash payout at regular intervals. However, not all companies and ETFs pay dividends, so it’s important to check before investing.
You can choose to receive your dividends in cash or reinvest them . Reinvesting dividends can be done manually or automatically through a dividend reinvestment plan.
Why do companies pay dividends?
Companies that pay dividends tend to be well-established, profitable, and focused on rewarding their shareholders with a share of their earnings. Paying dividends can signal financial strength and reliability. This can attract investors who value steady income rather than just capital gains.
Dividends can also help companies build loyalty among investors. If shareholders know they’ll be receiving a payout regularly, they might be more inclined to hold on to their shares long-term. That kind of stability can help keep stock prices steady and attract even more investors.
On the flip side, not every company chooses to pay dividends. High-growth businesses – especially in tech – often reinvest their earnings into expansion, research, and new products instead of distributing profits to shareholders. Their strategy is to drive future growth, betting that their share price will increase over time.
What is a dividend reinvestment plan (DRP)?
A DRP automatically reinvests your dividends to purchase more shares in the company or ETF instead of paying the dividends to you in cash. The shares are purchased at the current market price, and in some cases, you might even get a discount.
How to set up a DRP in Australia
- Log into your share registry account using the details provided by your broker.
- Find the DRP section under your holdings.
- Opt into the DRP and choose whether you want to reinvest all or part of your dividends.
- Confirm your preferences and save your settings.
Tash shares a tip: "If you’re not sure who your share registry is, try searching your email account for their messages," she says. "If not, it might be those letters you've gotten in the mail. There's usually a number that you can use to try and log in."
Some ETFs automatically enrol investors into a DRP. If you want to opt out, you’ll need to log in to your share registry and change your settings.
Pros and cons of a DRP
Pros
- Automation : As mentioned, dividends are reinvested automatically, eliminating the need to decide how to use them.
- No brokerage fees : Most DRPs don’t charge transaction fees for reinvesting dividends.
- Potential discounts : Some companies and ETFs offer a discount on shares purchased through a DRP.
- Reduces temptation to spend : Since dividends don’t land in your bank account, you won’t be tempted to spend them.
"It was nice – it was happening in the background," Ana shares of her experience. "And in fact, now my investments have grown faster because those dividends were invested right away instead of hitting my bank account."
Cons
- Tax implications : Even if dividends are reinvested, they are still taxed as income.
- Lack of control : Your dividends are automatically reinvested into the same stock or ETF, limiting your flexibility.
- Whole shares only : The ASX only allows purchases of whole shares, so it may take a long time for small investors to accumulate enough dividends to buy a full share.
- Complicated capital gains tracking : Each reinvestment creates a new cost base, making capital gains tax calculations more complex. Tash warns: "It can make figuring out capital gains tax a bit more tricky in the future. Instead of maybe investing 12 times a year, you'll have these extra smaller transactions to track."
Manual dividend reinvestment
If you prefer more control, you can reinvest your dividends manually. This means having your dividends paid into your bank account and then using them to buy shares at your discretion.
Why manually reinvest?
Tash explains why she prefers this method: “I want control, and I want to be able to change my mind if I decide to buy a different ETF.”
For investors with multiple ETFs, manually reinvesting allows you to direct your dividends into the asset that aligns best with your strategy.
Ana shares her experience: "I used to have a DRP turned on, and I didn’t realise it at first. Then I saw that I held a lot more of a specific ETF than I had planned. It worked well for me at the time, but when my investing strategy changed, I decided to turn it off.”
You might also like having the option to invest when the market dips. If you're getting dividends at a high price, you may prefer to wait a while and invest when you see a better opportunity.
Should you use a DRP or reinvest manually?
The decision comes down to your investing style and preferences. A DRP can be great for a set-and-forget strategy , ensuring your dividends are reinvested immediately. However, if you want more control over which investments you top up, manual reinvestment might be the better choice.
Tash highlights another consideration: “Some companies offer a discount on DRP purchases, like Fisher & Paykel, which offers 3% off. If that’s something that aligns with your investment, it could be worth it.”
If you’re someone who doesn’t want the hassle of deciding where to invest your dividends, a DRP can make investing more straightforward. On the other hand, if you want to tailor your portfolio, manually reinvesting your dividends gives you flexibility.
Ana encourages investors: "You should actually celebrate any win that you have. Even if it's just a few cents or a few dollars from dividends, that's your money making money."
A final reminder
There’s no wrong decision when it comes to reinvesting dividends – both strategies can help grow your wealth over time. If you’re unsure, you can start with one approach and switch later, much like Ana did.
The key takeaway? Find what works for you and stick to it. And remember, you can always change your mind.
If this episode sparked something in you, give it a five-star rating, drop a review, or better yet, share it with a friend. And if you're just starting out, the first ten episodes will get the financial gears turning. Follow us at @getrichslowclub and catch our personal updates at @tashinvest or @anakresina.
Happy investing!
