This Dividend Investing Strategy Deserves a Second Look

Are you putting enough thought into reinvesting your stock and fund dividends?

Why it matters: You may have checked a box indicating a reinvestment preference when you opened your brokerage account. Your 401(k) provider likely checked “Yes” for you when you signed up. If you haven’t given it a second thought since, the reinvestment election deserves your attention. Does your decision match your financial goals? And are you managing the necessary details? Amy Arnott, portfolio strategist for Morningstar Inc., reveals tips for smarter dividend reinvesting.

8 Questions for Smarter Dividend Reinvesting

1. Let’s focus on when dividend reinvesting works as a strategy and when it does not. Who should consider reinvesting dividends?
2. When shouldn’t an investor reinvest their dividends?
3. Are there any differences between reinvesting dividends in a taxable vs. a tax-deferred account?
4. What types of dividends are taxable and nontaxable?
5. How long you’ve owned a dividend-paying stock matters when it comes to taxes. Can you explain the differences between qualified and nonqualified dividends?
6. What kind of recordkeeping does reinvesting dividends require, and how does reinvestment affect the cost-basis?
7. How are considerations different for stock dividends vs. fund dividends?
8. What’s the final takeaway for the audience about dividend reinvestment?

Key Quote on Tax Treatment for Reinvested Dividends

“In a tax-deferred account, if you’re saving before retirement, normally your dividends would automatically reinvest and you don’t really have to think about it.

The dividends just get reinvested, and it becomes part of your portfolio balance that’s growing and compounding over time, and you don’t have to worry about taxes until eventually you start taking assets out of that tax-deferred account, and then everything would be taxed as ordinary income. So, whether it was originally from a dividend or capital appreciation doesn’t really matter.

Things get a little bit more complicated on the taxable side.”

—Amy Arnott, portfolio strategist for Morningstar Inc.

The Takeaway: Figure out what your priorities are when deciding whether to reinvest your stock and/or fund dividends, Arnott says. If you’re focused on long-term growth, you may want to reinvest. However, if you want to generate income or simplify your tax situation, you may want to choose the opposite.

More From Morningstar on Dividend Investing Strategies

If you own stocks directly, you may have an opportunity to set up a dividend reinvestment plan. Many publicly traded companies offer them. Arnott explains how they work in this article.

Bryan Armour, Morningstar’s director of ETF and passive strategies research for North America, reveals which dividend ETFs strike the right balance for income investors. And check out which dividend-payers made the cut for Morningstar’s 10 Top Dividend Stocks for 2025 and 13 Elite Companies With Fast-Growing Dividends.