Most large brokerages provide investors the opportunity to deposit dividend payouts in cash accounts or automatically reinvest dividends back into a stock, mutual fund or ETF. Investors are able to select which securities to reinvest dividends for free. For instance, Scottrade allows investors to buy, commission-free, up to five eligible securities at a time under its Flexibile Reinvestment Program. Nevertheless, investors should check with their brokerage platforms to see if a dividend ETF is eligible for a commission-free dividend reinvestment plan.
Dividend reinvestors should note that mutual funds and ETFs’ reinvestment schedules slightly differ. Specifically, mutual fund dividends are reinvested at a fund’s net asset value on the ex-dividend date, whereas ETFs have to wait until the transactions settle, which takes a few days before adding shares.
Dividend investors have historically enjoyed strong returns. Since 1926, stocks that pay a dividend have outperformed non-dividend-paying stocks by an annualized 1.7%, according to Morningstar data. With reinvested dividends, investors are able to increase shares over time, which can add up, Pelant said.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.