How to Reinvest Dividends from ETFs

4 mins read

Dividend from ETFs

Dividends collected from your assets may be reinvested to expand your portfolio without draining your bank account. Reinvesting dividends obtained from exchange traded funds (ETFs) is a little more difficult than reinvesting dividends earned from mutual funds. Dividend reinvestment may be done manually by buying more shares with the money received from dividend payments, or automatically if the ETF enables it.

Although most brokerages will enable you to set up a dividend reinvestment plan for any ETF that pays dividends, automatic dividend reinvestment programmes straight from the fund sponsor are not currently available for all ETFs. This is a good idea since ETFs sometimes have extended settlement periods and their market-based trading makes manual dividend reinvestment impossible.

Strategies for reinvesting dividends

An automated dividend reinvestment plan is a fund or brokerage firm’s programme that enables investors to utilize their dividends to automatically buy more shares of the asset that paid them. Although the strategy is common in stock and mutual fund investment, it is relatively new in ETFs.

Although dividend reinvestment plans provide greater convenience and a simpler approach to increase your assets, they might cause some challenges for ETF investors owing to the differences in timetables. Some brokerage services, for example, enable automatic dividend reinvestment but only allow full share purchases. Any residual funds are put as cash in the investor’s brokerage account, where they are easily forgotten. Other companies take dividends and only reinvest them on a monthly or quarterly basis.

Others wait until the cash is actually deposited, which is normally later in the day, to reinvest dividends when the market opens on the due day. Reinvesting at 7 a.m. may purchase different shares than reinvesting at 10 a.m. since ETFs trade like stocks and their market values change throughout the day. One of the disadvantages of automatic ETF dividend reinvestment is that the investor loses control of the transaction and is unable to “time” the market.

Dividend Reinvestment Plan Meaning

You may manually reinvest dividends if your brokerage company does not provide a dividend reinvestment plan option or if automatic reinvestment is not permitted in the ETF you have invested in. Manual reinvestment is taking the money received from dividend payments and conducting a second transaction to purchase more ETF shares. You may be charged commission costs for these transactions, just like any other trade, depending on where you keep your investing account. Some brokerage companies, on the other hand, enable commission-free dividend reinvestment.

While less convenient than dividend reinvestment plans, manual dividend reinvestment gives the investor greater control. If you suspect the share price will decline, you might opt to wait instead of paying the market price for the additional shares on the payment date. If you think the ETF is underperforming and wish to invest elsewhere, it also gives you the option to retain your dividends in cash.

If you choose to manually reinvest your ETF dividends, keep in mind that settlement delays might reduce your dividends’ buying power. Dividend payments generally take longer to settle since ETFs, unlike mutual funds, depend on brokerages to follow their shareholders. ETF distributions may take two days or more to settle than typical mutual fund payouts, which are usually one day. If your ETF is doing well, the increased wait period may result in a higher share price.

Wrapping Up

Reinvesting dividends from ETFs is one of the simplest methods to increase your portfolio, but due to the structure and trading procedures of ETFs, it may not be as straightforward as reinvesting mutual fund income. Check with your brokerage provider to verify which of your ETFs are eligible for dividend reinvestment plans and how they are handled.

If you must manually reinvest, keep track of settlement times to ensure that you do not waste reinvestment time. Setting a market order for the moment your dividend is deposited may not provide you with the greatest price per share, so actively manage your transactions and utilize manual reinvestment to your benefit.