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Use of investment income to buy additional securities. Many mutual fund companies and investment services offer the automatic reinvestment of dividends and capital gains distributions as an option investors.


The act or practice of taking profits or other proceeds from investments and making other investments with them. It nearly always means that one is investing in more of the same security. For example, one may take dividends from a stock and buy more shares with it or may take coupon payments to buy more of the same bond issue. Reinvestment often increases the value of a security.


When you own certain stocks and most mutual funds, you can reinvest the dividends or distributions to buy more shares instead of receiving a cash payout.

In a corporate Dividend Reinvestment Plan (DRIP), for example, a company offers you the right to reinvest any cash dividends automatically to buy more stock. When you open a mutual fund account, you're generally offered an automatic reinvestment option as well.

One benefit of reinvestment programs is that in most cases you can make the new investments without incurring the usual sales charges, so it can be a lower cost way to build your investment portfolio.

One potential drawback, if you're reinvesting in a taxable account, is that you acquire shares at different prices, so figuring the cost basis for capital gains or losses when you sell can be more complicated than if you made fewer, larger purchases. It's also true that you owe income or capital gains tax in the year the money is reinvested, which isn't the case in a tax-deferred or tax-free account.

You will also want to consider the impact of reinvestment on the diversification of your portfolio, since buying additional shares increases the percentage of your portfolio that is allocated to a particular stock or mutual fund.

References in periodicals archive ?
Evans noted that a payment may be able to be structured as a permitted reinvestment if the CFC's plan is qualified under section 401(a) of the Code.
He said that future guidance should address the issue and that it may qualify as a permitted reinvestment.
Bernard observed that the Notice is silent in respect of when the dividend reinvestment plan must be completed.
With inadequate means of matching top-down and bottom-up requirements in allocating reinvestment capital, many companies have largely curtailed capital spending for easily identifiable, long-term earnings enhancing investment projects.
Over several years, the reinvestment ratio should exceed the depreciation-amortization impact ratio to ensure sufficient replacement of assets at higher current costs.
Since each represents a major component of the denominator in the cash flow adequacy ratio, the long-term debt payment, dividend payout and reinvestment ratios are discussed by industry.
From 1986 through 1988, food companies showed increases for long-term debt payments, dividends and reinvestment in assets.
Dividend reinvestment plans (DRPs) enable stockowners to purchase more shares each quarter with their dividends.
The software program, Dividend Reinvestment Plan Portfolio Tracker, is intended as a stand-alone program to keep a running record of DRP transactions.
Stockholders who are presently enrolled in the existing Dividend Reinvestment and Stock Purchase Plan will continue to be enrolled in the amended and restated Plan unless the Company or the transfer agent is properly notified.
Equity dividend reinvestment is an additional incentive for customers to keep securities in their brokerage accounts," Mazzarella said.
Fidelity also added another 100 securities by enrolling in the Depository Trust Company (DTC) discount dividend reinvestment program.