Reinvesting for More: Basics on Dividend Reinvestment

Most of the time, when a person invests in a company, they expect to get those investments back with a return once the venture manages to make a profit. There is nothing wrong with that, as it is the usual way for investors to make a living. Their investments benefit the company, and whatever they earn from their customers will tend to be given back for further investment elsewhere.

Now, while the process usually repeats once the investor gets their money back, an alternative cycle could allow them to earn more from the same investment in the long run. Dividend reinvestment is a method where the investors do not accept their cut of profits via receiving funds. They will instead give those earnings back to the company for a chance to get more shares, thus, giving them a more significant share holding and possibly a bigger profit.

If you are interested to know more about this process, look no further than the helpful pieces of information we have listed below.

Pros and Cons of Investing in a DRP

As mentioned, a dividend reinvestment plan allows the investor to get more if they reinvest their share of the profit.

If you don’t need the cash and already have a vital piece of the well-performing company in question, it could be a good opportunity to double-down. Now, you are earning money and the right to vote in significant decisions that may take the venture to a much better position in the open market.

On the other hand, implementing a DRP could result in an overweight portfolio in the long-term. In other words, your asset allocation may no longer represent your tolerance to risk as well as the negatively affect your financial goals and plans for the future.

Would a DRP Be a Fit for Me?

Your personal preference best answers this question. DRPs are more about stacking your portfolio rather than earning more money. 

If you do not have any financial concerns, you may go for it. However, suppose you are already satisfied with the company’s monthly earnings without investing more effort in decision-making. In that case, you may take your cut and wait for more profit.

You should discuss your options with your Financial Adviser and determine what strategy would be best help you to achieve your goals.

Do I Have to Worry about Taxes?

When it comes to your taxes and DRPs, according to the ATO:

• you must declare the dividend as income in your tax return
• the additional shares are subject to capital gains tax (CGT)
• the acquisition cost of the additional shares is the amount of the dividends used to acquire them.

Should you reinvest your dividends?

DRPs are a great potential strategy if you want to grow your financial and asset portfolio. It’s an excellent way to increase your assets and earnings in the company. It also allows you to get a general idea of its profits every month, given that you have direct access to the numbers. Be sure to ask about their policies and regulations and apply for one if you feel like getting a bigger slice out of the venture.

If you would like to get expert investment advice from the top financial planners of today, look no further than Coastal Advice Port Macquarie. We specialise in investment advice and wealth management as well as other financial advice services. Contact us today!