So, you just received a dividend—nice! Now comes the big question: Should you reinvest it or take the cash? Both choices have their pros, and the best one depends on your financial situation and future goals.
Whether you’re saving for the long run or looking for extra income now, how you handle your dividends can really impact your investment journey.
In this article, we’ll break down both options to help you figure out what’s right for you.
What Are Dividends, Anyway?
Dividends are payments that companies give to shareholders as a way to share their profits. It’s their way of saying “thanks for investing.” Companies offer dividends to attract investors, show financial stability, and provide regular income.
Dividends can come in different forms:
- Cash dividends – the most common type, paid in cash (usually every quarter)
- Stock dividends – paid as extra shares instead of cash
- Property dividends – rare, but sometimes companies give assets or inventory
Keep in mind: dividends aren’t guaranteed. A company’s board decides whether to pay them, and they can pause or cancel them anytime.
What Does “Reinvesting Dividends” Mean?
Reinvesting dividends means you use the money from your dividend to buy more shares of the same company—automatically. This is often done through a Dividend Reinvestment Plan (DRP), which many Aussie investors love.
Here’s how it works:
- Your dividend is used to buy more shares, sometimes even at a discount
- You don’t have to pay any commission
- You can buy fractional shares if the dividend isn’t enough for a full share
- It happens automatically on the dividend payment date
It’s a smart way to grow your investment over time—without spending extra money. The more shares you own, the more dividends you’ll earn next time. That’s the magic of compounding.
⚠️ Note: Even if you don’t receive the dividend in cash, it’s still taxable income in Australia.
Also Read: What Small-Cap Stocks Could Explode This Year?
Why Reinvest Dividends?
Here are a few reasons why reinvesting can be a great move:
📈 Compounding Growth
Your earnings build on top of previous earnings. Reinvesting helps your portfolio grow faster over time.
👊 Bigger Ownership
Every time you reinvest, you own more of the company. This can lead to greater gains if the stock performs well.
💰 Possible Tax Benefits
In some cases, taxes on reinvested dividends can be deferred until you sell your shares. (Talk to a tax expert for details.)
📉 Dollar-Cost Averaging
When prices are high, you buy fewer shares. When prices are low, you buy more. This helps smooth out the price you pay over time.
Also Read: How Do You Buy Your First Stock Step-by-Step?
Why Take Dividends in Cash?
Reinvesting isn’t always the right choice—sometimes taking the cash just makes more sense.
💸 Immediate Income
You get the money right away and can use it however you like—pay bills, travel, or invest elsewhere.
🔄 Flexibility
You’re in control. You can choose to reinvest it in another company, save it, or spend it.
⚖️ Manage Risk
Taking cash reduces your exposure to one stock. That can be helpful in a shaky market.
💼 Extra Liquidity
Having cash on hand is especially helpful for retirees or anyone needing steady income without selling shares.
So, Which Option Is Better?
There’s no one-size-fits-all answer. Here are some things to think about:
🎯 Your Goals
Want to grow your money long-term? Reinvesting may be your best bet.
Need cash now? Taking the dividend might be better.
💵 Your Financial Situation
If you’re relying on your investments for income, cash dividends make sense. If you’re still building wealth, reinvesting might be smarter.
🧾 Taxes
Dividends are taxable, whether you reinvest or not. But how and when you pay taxes might differ. It’s worth checking with a tax adviser.
📉 Market Conditions
In a volatile market, having cash gives you more flexibility and safety.
📊 Company Health
Trust the company? Reinvesting could pay off long-term. Unsure about its future? Cash might be safer.
Also Read: How Does the RSI Indicator Work in Stock Trading?
Final Thoughts: Pick What Works for You
- Reinvesting can help your investment grow faster through compounding.
- Taking cash gives you flexibility and income when you need it.
There’s no right or wrong answer—it all depends on your financial goals and personal needs. Whatever you choose, make sure it fits your overall investment plan.