Should You Re-Invest Your ETF Dividends?

A few days ago, I posted about the tremendous increase in assets ETFs experienced over the past few years.

I also mentioned that, once pension plans and 401k make ETFs available to their investors, more money should flow in that direction. Several readers pointed out that a problem could be the transaction fees of ETFs for re-investing dividends.

I did not think that there were transaction charges for re-investing dividends; a call to my custodian (Schwab) confirmed that this in fact is true—no fees. If you have your assets housed with a different firm, you might want to verify this. Whatever you find out about this topic, I’d appreciate it if you would post your findings in the comment section below.

While on the subject, should you re-invest dividends at all? There are different views, and I understand all about compounding your earnings. However, if you are investing with a taxable account, you should definitely reconsider.

If you are invested in a no load fund or ETF that pays regular dividends, your year end basis calculations could be a nightmare, or at least require some time commitment on your part. Your tax preparer will not want to do it.

The other choice is, one that I favor, to let your dividends accumulate. They will earn interest in the money market portion of your account and compound that way. Once you have a more substantial amount collected, say a few thousand dollars, invest the lump sum.

This will also give you the opportunity to put your money in a different fund/ETF at that time, in case the one that generated the dividends is no longer a great performer.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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