Dividend Channel Staff
A useful tip: when you start buying a position in a dividend stock, notify your broker that you would like to receive a cash dividend.
Do so, that is, if you would prefer your dividend in cash, rather than have it reinvested into more shares of stock. Many
people do not realize until later, that the company whose stock they purchased has adopted an ''opt-out'' dividend reinvestment
plan which means that the Board of Directors of that company, when they declare a dividend, can authorize that
shareholders will have their cash dividends automatically reinvested into newly issued additional shares of common stock
— unless that is, the shareholder has specifically opted for cash. And to do that, you must tell your broker (or if you
hold the stock certificate yourself, you must notify the transfer agent).
Some companies, either by choice or by charter, pay out nearly all of their earnings as dividends (Real Estate
Investment Trusts (REITs) and Business Development Companies (BDCs) are two types of companies that are legally required to pay out almost all of
their earnings to shareholders. With little to no earnings retained, such companies often require new debt or equity capital
in order to grow. So by adopting an opt-out dividend reinvestment plan, they are able to hold onto some of their earnings (to
the extent shareholders have not opted out). One example of a BDC with such a plan is Apollo Investment Corporation (AINV).
But for investors interested in compounding their returns by reinvesting their cash dividends into more shares, even
dividends from companies that do not have such ''in-house'' plans can still be reinvested, automatically, by most brokers upon
request. Investors can also ''manually'' reinvest a cash dividend by using that cash to buy additional shares of the same
stock, or additional shares of a different stock.
If an investor chooses cash dividends, the dividend payment will appear in their brokerage account after the ''pay date''
(which was announced by the company when they declared their dividend). If an investor chooses an automatic dividend
reinvestment program (DRIP) alternative, the cash dividend will be reinvested into the same stock at market prices. The power
of compounding is illustrated by our DRIP Returns Calculator where you can enter any
dividend stock symbol, and compare how your returns would look (for any start and end date) if you collected each dividend as
a cash dividend, versus reinvesting your dividends.
A great resource to keep track of upcoming cash dividend opportunities, is our Live Cash Dividend Declarations feed.