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Should I turn on automatic dividend reinvestment or take the cash?

A DRIP (dividend reinvestment plan) automatically uses your dividends to buy more shares, often as fractional shares, instead of paying cash. During your working, wealth-building years this is usually the smart default: it keeps your money compounding, buys more shares at various prices, and costs nothing at most brokers. Just flip the DRIP setting on for the position or account. Reasons to take cash instead include needing income in retirement, wanting to rebalance into other holdings, or not wanting to add to an overweight position. Note that in a taxable account, reinvested dividends are still taxed the year you receive them, and each reinvestment creates a new tax lot you'll need to track for cost basis. In IRAs and 401(k)s, reinvesting has no immediate tax effect.

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Educational disclaimer. Everything on WealthSerene.com is educational and is not investment advice. Projections and calculations are illustrative; actual results depend on market conditions, your situation and factors outside this tool’s scope. For a decision specific to your situation, consult a qualified financial professional. View full disclosures