The Carrie Finances: Should I Stop Reinvesting My Dividends?

Back when I was uncovering my hereditary financial habits, I learned that my dad’s mom was an avid dividend investor. When my dad was 15, his mom bought him stock in IBM Corp. (IBM) to get him interested in investing. She also put him to work and had him oversee her dividends. My dad would have to maintain a manual bookkeeping spreadsheet to verify which amounts were going into her account and match the dividend depending on the company and the month. All of this was done on paper, adding another level of difficulty.

These days, the process is much more automated, to the point where you might not even know when you receive dividend income unless you regularly check your brokerage account. After years of reading about reinvesting dividends in articles for AAII Dividend Investing, I couldn’t help but wonder: Should I stop reinvesting my dividends for a little extra income in these hard times?

A dividend is a payment that companies make to their investors using excess profits, usually on a quarterly basis. Much like an annual cost of living adjustment in salary, companies are expected to increase their dividend annually to keep up appearances and keep their investors around.

My portfolio is invested in five environmental, social and governance (ESG) exchange-traded funds (ETFs). I don’t require any dividends as part of my investing strategy, but when I started investing, I chose to reinvest the dividends that each of my ETFs pays. The most common way investors reinvest their dividends is through an automated process called a dividend reinvestment plan (DRIP). These plans require that you hold at least one share of the dividend-paying security in a brokerage account.

The main advantage to reinvesting your dividends is the magic of compounding: An investment that reinvests in itself will make more money in the long run. When a dividend is reinvested, it means that you are buying more shares of the security with that dividend. I can tell which of my investments have dividends in my brokerage account by looking at the number of shares I own under “Quantity”:

Most of my share counts are not whole numbers, even though I initially bought whole shares of each ETF. Some investments don’t allow you to buy fractional shares, so this is another advantage of reinvesting dividends. There are also no fees involved in the dividend reinvestment process, which used to be more of a flex before most brokers made investing commission-free.

According to Investopedia, one of the times you should consider not reinvesting your dividends is when you are in or nearing retirement and need the extra income. Likewise, if an investment is not performing well, it’s not a good idea to reinvest more money in that holding.

Now for the moment of truth: How much dividend income is my portfolio receiving? In 2022, I got a whopping $4.03 in dividend payments. So far in 2023, I’ve received $20.08 in dividends, which was a direct result of adding more money to my investments. My Charles Schwab brokerage account estimates that I will receive a total of $48.53 in dividends this year.

Unfortunately, I don’t think $50 would make that big of a difference if I chose to stop reinvesting my dividends. (It certainly wouldn’t buy Carrie Bradshaw a new pair of shoes, but it might cover her drive-thru order below!) Regardless, the money would still be sitting in my brokerage account cash balance waiting to be invested, so I don’t see much of an advantage to interrupting the compounding process.

For now, I’m going to continue reinvesting my dividends and keep an eye on how that income increases as time goes on. If one of my ETFs performs so poorly that I don’t want to invest more money in it, it would be a candidate for deletion before I would consider stopping the dividend reinvestment process.