When it comes to reinvesting dividends there are really only 2 options. The first option is to use a dividend reinvestment plan also known as a DRIP. The second option is to just reinvest your dividends yourself. There are a few advantages and disadvantages to each of these strategies.
DRIPS are the main strategy that most people use. They are very convenient because everything is done for you automatically, you get paid the plan buys your shares automatically and your done. This can either be done through your broker or through whichever company you bought the shares from depending on the situation. The nice part about this is that you don’t generally have to pay broker fees if you use a DRIP (assuming you use a broker that charges per trade still). Depending on the plan you generally get a discount on whatever the stock price is when your DRIP buys it as well. Whether that is 2% or 5% or whatever depends on the stock itself. Some DRIPS will also allow you to buy fractional shares as well. This means that 100% of your dividend money is put to work to make you more money. DRIPS also means your shares don’t get diluted as other people’s drips buy more shares either. The biggest downside of a DRIP and the reason that I don’t use it is that you have no control over what the share price is when your DRIP actually buys it. The other downside is that if you can’t buy fractional shares with your plan you will just have money sitting there doing nothing until your next dividend payment.
Reinvesting you’re dividends yourself also has several advantages. This strategy allows you to pick and choose where and when you would like to spend your dividends. The advantage of this is that you can spend this money on any stock that is a price you are willing to pay including the stock that pays you the dividend. This is the main reason I use this strategy, you lose out on the auto buying and slight discounts some DRIP’s offer but you retain full control of your money. The other advantage of this strategy is that if you don’t have enough to buy a full share of the stock that pays the dividend you can hold onto that money, buy something else, or add a little money so you can buy a full share of that stock. One of the downsides of this strategy is that if you don’t buy more of the stock that pays your dividend you’re holding might be slightly diluted due to other peoples DRIPS automatically buying shares. The other downside is that you will have to actively manage your dividends, which is only a problem if you don’t already actively manage your money.
These are the two main options for reinvesting your dividends and my take on them. It is really up to your personal discretion but it never hurts to look at both sides before deciding on one way vs. the other.