Reinvesting dividends: where the return leaks away

Dividends arrive as money and require a separate decision. Not deciding is also a decision — in favour of the money sitting there.

What is lost

Compounding works only on invested money. A payout left in the account takes no part in further growth — Compound interest: why it gives nothing in the early years.

{{figure:compounding|caption=The gap between spending income and reinvesting it decides the result over a long horizon}}

Three obstacles

Tax: what gets reinvested is the amount after withholding — Tax on dividends: why less arrives than was declared.

Commission: small purchases of small amounts cost proportionally more — Fees: small numbers that decide the outcome.

Attention: payouts arrive at irregular intervals in small amounts and are easy to forget.

Where to reinvest

Not necessarily into the same security. Directing payouts into positions that lag works as rebalancing without selling — and therefore without tax and without resetting the holding period — Rebalancing: returning to the target weights, Long-term ownership relief: paying no tax without arranging anything in advance.

When not to reinvest

When the portfolio is in its drawdown phase and the dividends are the point. Then the payout is not lost — it is doing its job.

Related: A dividend strategy: income instead of growth.