Reinvest or Take the Cash? How to Decide on Your Dividends

In dividend investing, everyone faces an important decision:

To reinvest, or to take the cash?

While it’s usually thought that you should re-invest while you are working and take cash later in life, the decision isn’t actually always that simple. In addition to the choice about when to begin taking cash, you also have to think about whether to re-invest automatically, or exert some choice over your re-investment plan. Each of the two options has its strengths and weaknesses. In this article, I will explore the choice of reinvesting dividends vs. taking cash, and how to approach reinvestment.

When to reinvest

Reinvestment comes in two basic forms:

1. Manually using cash paid by dividend stocks to buy more shares, whether in the company that paid the dividends or other companies.
2. Automatically reinvesting via a DRIP program.

Each option has its pros and cons.

A DRIP program is cheap, as it spares you the trading costs (fees & spread costs) normally incurred by trading. Manual re-investment is flexible, letting you allocate dividends to shares/ETFs other than the ones that paid them.

Generally, if you hold a diversified index fund portfolio, you’re better off using a DRIP plan than reinvesting manually. The reason is that you are passively invested, with not a whole lot of active security selection going on. You’ll probably save more money avoiding trading fees than you’ll make by switching in and out of stocks. If you’re an active investor, maybe manual re-investment will work if you know what you’re doing – but most investors don’t have enough of an information edge to justify active trading.

When to take the cash

The best time to take cash dividends is when you have pressing financial needs that can’t be met from other income sources. In this case, letting dividends be paid out – or even selling stock – can be warranted. Ideally, this would happen when you retire. However, letting dividends pay out during a period of temporary unemployment and/or disability could be a reasonable thing to do.

Why not both?

A final option you have when it comes to dividend reinvestment is to reinvest some of your dividends and take some of them. This is easy to do if you’re reinvesting manually. It can even be done with a DRIP plan by spreading your shares across different accounts.

Let’s say you take a stock like Enbridge Inc (TSX: ENB) – one that has a high yield – and spread your investment across a few different accounts. By doing this, you can use a DRIP plan in one account, while letting the dividends get paid out in another one. In the DRIP account, you will automatically be reinvested, while in the other account, you’ll have the flexibility to reinvest into any stock you like, or even take cash.

Now, if you have $100,000 worth of Enbridge stock, you’ll get about $5,866 worth of dividends per year, as the table below shows. This is enough dividends to make a difference in your life. So, if you have pressing financial needs and don’t want to sell your ENB stock, maybe you could put 20% of it in a reinvestment account and leave 80% in a non-reinvestment account, and collect $4,693 per year. That could be enough cash to make a difference in your life, and enough reinvestment to boost your returns somewhat.