Power of Reinvestment

• Reinvesting dividend income can be an important part of the overall return on your investment. It's similar to compounding interest, with the principal of your investment constantly growing and theoretically paying higher dividends each quarter. The process takes time, but reinvesting your dividends can increase your total return in the long run.
  
  

Sources of Dividend Income

• A company typically pays dividends to its shareholders four times per year, while investment trusts often pay dividends monthly. Many kinds of mutual funds, and even some ETFs (exchange-traded funds), are designed to pay regular dividends based on their holdings. Ownership of any of these kinds of equities will result in dividend income.
  
  Some large companies allow the purchase of stock directly from the company, encouraging enrollment in a dividend investment plan (DRiP) in which the dividends are paid in additional shares. This benefits the company by minimizing its capital outlay for dividends while increasing the position size (and principal for future dividend payments) of the shareholder.
  
  

How to Reinvest Dividends

• Many brokers will ask at the time of purchase whether you want to elect to reinvest dividends or accept cash; you can change your selection at any time. Participation in a DRiP often affords additional benefits, such as low- or no-fee reinvestment purchases or purchases below market price. While it's possible to use cash dividends for reinvestment in other areas, dividend reinvestment makes it easy to maintain the discipline necessary for a long-term investment strategy.