Summary of Should I Reinvest Dividends and Capital Gains?

Overview of Should I Reinvest Dividends and Capital Gains?

In this DIY Money episode, the hosts answer a listener question about what it means when dividends and capital gains are sent to a settlement fund instead of being automatically reinvested. The main takeaway is that, in most brokerage accounts, investors should be able to choose dividend reinvestment and, for mutual funds, capital gains reinvestment as well. The episode also explains why this matters, when you might want cash instead of reinvestment, and how to handle it if your brokerage makes it difficult.

Main Question Answered

Ms. Baker asks why her individual stocks in a brokerage account and Roth IRA are set to send dividends and capital gains to a settlement fund, and why she cannot easily change them to reinvest automatically.

The hosts explain:

• Dividend reinvestment is usually standard and should be available at most custodians.
• If the platform won’t let her change the setting, she should call the brokerage directly.
• If they cannot enable reinvestment, it may be worth moving the account to another custodian.

Key Takeaways

Dividend Reinvestment

• If you want to grow your portfolio over time, reinvesting dividends is usually the default choice.
• When dividends are not reinvested, they typically sit as cash in a settlement fund or money market-like sweep account.
• That may be fine if you want cash flow, but not ideal if your goal is long-term compounding.

Capital Gains Reinvestment

• For mutual funds, investors often need to reinvest capital gains distributions separately from dividends.
• This matters because mutual funds can distribute gains even if the fund itself didn’t perform strongly that year.
• Failing to reinvest these distributions means you may unintentionally leave money in cash instead of keeping it invested.

Mutual Funds vs. ETFs vs. Individual Stocks

• The hosts note that mutual funds often distribute capital gains at year-end.
• Even index funds can generate capital gains due to:
  • index rebalancing
  • portfolio turnover
  • internal trading or changes in holdings
• Individual stocks may pay dividends, but not all stocks do.

Practical Advice Given

What Ms. Baker Should Do

1. Confirm the stock actually pays dividends.
2. Call the brokerage and request dividend reinvestment.
3. If it is a mutual fund, make sure capital gains reinvestment is also turned on.
4. If the custodian cannot support the setting, consider switching providers.

When You Might Not Want Reinvestment

The hosts also share examples where someone may intentionally want the cash instead of reinvesting:

• An income account using dividends for spending
• A portfolio built around laddered treasuries
• A strategy where distributions are used for monthly or quarterly withdrawals

Additional Notes

• The hosts point out that some money market funds may not be set to reinvest interest automatically, so it’s worth checking all account settings, not just stock holdings.
• They emphasize that many investors overlook these settings, especially when using multiple account types like taxable accounts and Roth IRAs.

Bottom Line

If your goal is long-term growth, you usually want both dividends and capital gains distributions reinvested. If your brokerage doesn’t let you do that easily, call them and verify the settings. If they still can’t accommodate it, moving the account may be the best solution. If you need the income, though, leaving distributions in cash may be intentional and appropriate.

Notable Closing Reminder

The episode ends with the classic DIY Money principle:

• Live on less than you make
• Invest the rest
• Do so for a very long time