Legal Definitions - reinvested dividend

A reinvested dividend occurs when a company distributes a portion of its earnings to its shareholders (a dividend), but instead of the shareholder receiving that payment as cash, the money is automatically used to purchase additional shares or units of the same investment.

This strategy allows the investment to grow more quickly over time through compounding, as both the original investment and the newly acquired shares from reinvested dividends can generate future earnings and dividends.

• Example 1: Individual Stock Investor

  Sarah owns 100 shares of "Tech Innovations Inc.," a company known for paying regular dividends. Instead of receiving a cash payment each quarter, Sarah has enrolled in Tech Innovations Inc.'s Dividend Reinvestment Plan (DRIP). When the company declares a $0.50 per share dividend, her $50 dividend (100 shares x $0.50) is not paid out to her bank account. Instead, that $50 is used to purchase additional shares of Tech Innovations Inc. for her portfolio, perhaps buying 1.5 new shares if the stock price is $33.33 per share. This increases her total number of shares, which will then generate even more dividends in the future.

• Example 2: Retirement Fund Growth

  David has a 401(k) retirement account invested in a large-cap equity mutual fund. The fund's investment strategy includes automatically reinvesting all dividends and capital gains. When the various companies held within David's mutual fund pay dividends, those amounts are not distributed to David as cash. Instead, the mutual fund manager uses those dividend payments to buy more shares or units of the same mutual fund within David's 401(k). Over decades, this continuous reinvestment significantly boosts the total value of his retirement savings without him needing to make additional contributions.

• Example 3: Child's College Savings Plan

  Maria sets up a 529 college savings plan for her niece, investing in an exchange-traded fund (ETF) that tracks a broad market index. She chooses an option within the plan that automatically reinvests all dividends. When the underlying stocks in the ETF pay dividends, those funds are immediately used to purchase more units of the same ETF within the 529 plan. This ensures that every penny earned by the investment is put back to work, helping the college fund grow faster and potentially reach its goal sooner, benefiting from the power of compounding over many years.