What Is a Dividend Reinvestment Tax?

Dividend reinvestment refers to the behavior of shareholders to re-use dividend income to purchase shares of the issuing company. Under normal circumstances, the company can automatically reinvest its due dividends according to shareholders' requirements and reinvest in the company's stock. Cash dividends may be invested directly in common stocks, and dividend stocks themselves are a form of reinvestment of corporate profits.

Dividend reinvestment

Right!

Dividend reinvestment

Developing a strategy that you can follow is the most important prerequisite for rational investment.

Strategy 1: DRIP and buy

The "DRIP and buy" strategy is a two-part plan. The first part is to use the dividend reinvestment plan (DRIP) for some dividend-type stocks. Generally, five or so stocks are recommended, and no more than ten stocks are needed because you need Get familiar with these companies immediately and have great confidence in their long-term profitability.

You also need to ensure that these companies have a good track record of paying dividends and increasing the amount of dividends paid.

The second part of the strategy is to buy in large quantities when very rare and attractive buying opportunities occur. Late 2008 / early 2009 is the most recent example, when very rare but very attractive buying opportunities appeared. . The table shows the stocks and prices that most investors may have bought at that time.

What needs to be understood is that buying stocks at multi-year lows like in the example above is not very easy and most people cannot do that. However, if you have a corresponding strategy, it is easier to buy at a low point as in the example. Of course, you may not lock the bottom exactly, but it doesn't matter.

The key here is that you have funds available when you stumble upon very low prices-and then always be ready to buy. Being ready to buy is based on having great confidence in the core business of these companies, which is back to the premise above, that is, buying only a small number of carefully selected stocks, so that you can know the relevant companies very well.

Strategy 2: Improved Dividend Reinvestment Strategy

Although this strategy places the same emphasis on dividend reinvestment as the first strategy, it has minor improvements.

There should only be a small number of high-quality companies in your portfolio. At this point, strategy two is similar, but this strategy does not automatically reinvest dividends. Instead, the strategy suggests collecting cash dividends and pooling them, and then reinvesting the cash periodically as the value of the investment appears.

For example, XX purchased McDonald's stock in the past year. The price of this stock has steadily climbed, and XX is crazy about the current price level of this stock. Unlike automatic reinvestment dividends, XX is to accumulate cash dividends and invest dividends in companies like Wal-Mart, because XX believes that these companies have greater value at current price levels.

By investing dividends in stocks that appear to be better buying opportunities for the time being, and allocating funds more efficiently, the result may be better, as the value of the portfolio will increase more in the long run.

Again, it is a necessary prerequisite for this strategy to track the overall market and have a deep understanding of a few specific companies.

No matter which strategy is adopted, it is to build a huge dividend company in the long run to increase the value of the investment portfolio. This is a long-term process and investors should be patient. You can add value to large portfolios by reinvesting dividends and allocating large amounts of money when opportunities arise.

A dividend reinvestment plan is an arrangement in which a company distributes dividends received by common shareholders to purchase additional shares of the company's common stock. Dividend reinvestment plans started in the 1960s and developed in the 1970s. By 1984, more than 1,000 companies in the United States had proposed dividends from common shareholders for reinvestment.