How does automatic reinvesting Stock Dividends work?

[StormRider]

I have some stock that pays dividends (Intel, Time Warner etc). I have heard that reinvesting your dividends towards more stock purchases is a good thing to do. How does this work? For example, I just got $6.25 in dividends from my Time Warner stock. How do I get it to automatically go to purchase more Time Warner stock? Do I have to wait until I can buy whole shares? Or can I purchase fractional shares?

 

[maddogchen]

if your broker has a automatic dividend reinvestment system you can ask them to turn it on and they will automatically reinvest the dividend into shares of that stock. You will be allowed to get fractional shares when you reinvest dividends.

Problem is a tax issue if you are doing this in a taxable account. You must maintain good records of when you reinvested your dividends.

There might also be a problem when you sell fractional shares depending on the broker. I've never actually sold one with fractional shares so i dont know

 

[vi edit]

Depends on the broker and the company and sometimes some combination of the two.

Ameritrade had a "DRIP" list that showed what stocks could be reinvested and you had to designate on your account what you wanted to do with Drip eligible stocks. If it was Drip eligible they buy as many shares as they could with the dividend, and if there was any balance left over they'd deposit it in your cash account. If you didn't have enough to buy a share, they would just deposit the cash in your account.

The problem with some brokers (like Ameritrade) is that not many stocks are Drip eligible.

First Trade is one of the few that does automatic drip on every stock and even does partials for you. That is a pretty nice feature if you are interested in that type of investing.

Some stocks let you bypass the broker altogether and setup a dividend repurchase through their investor relations sites.

 

[ahurtt]

Some general advice on dividend reinvestment. . .when the stocks price is high or rising in relation to it's historical average, don't do it. Do it when the stock price is low or declining. That way you get more shares for your money. This naturally assumes you are in the stock for the long term and requires you to actively monitor which way the stocks price is generally trending from time to time.

 

[oznerol]

There's usually an option for dividends under "account information" on various broker websites. Just look for "Reinvest in security."

You will buy whatever shares you can given the dividend (including fractional shares).

 

[Bryophyte]

My kids' Sharebuilder accounts automatically reinvest dividends (I set it up that way) and they buy fractional shares.

 

[imported_Lothar]

Originally posted by: ahurtt
Some general advice on dividend reinvestment. . .when the stocks price is high or rising in relation to it's historical average, don't do it. Do it when the stock price is low or declining. That way you get more shares for your money. This naturally assumes you are in the stock for the long term and requires you to actively monitor which way the stocks price is generally trending from time to time.

That advice is just as useless as the "Buy low, sell high" advice.