Drip investing and taxes

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This process is usually pretty simple and can be done online. Fund Your Account This step is essential in order to start buying drip stocks! You can fund your account by transferring money from your bank account.

You can also fund your drip account by buying shares of stock directly from the company. There are many different resources out there to help you make this decision, including financial websites, magazines, and even television shows. You can do this either online or over the phone. Pros and Cons of DRIP Investing There are many pros to starting a drip program, including: Lower Commissions One of the biggest benefits of drip investing is that it offers lower commissions than traditional stock investing.

Immediate Investments One of the biggest benefits of drip investing is that it allows investors to buy drip stocks immediately, as opposed to having to wait for a stock sale. Read more: Tax Loss Harvesting Dollar-cost Averaging Dollar-cost averaging is a technique that can be used with drip investing.

This method involves buying stocks at regular intervals, regardless of the drip stock price. This can help to reduce the risk that comes with investing a large sum of money at once. By buying stocks over time, you are essentially buying them at different prices, which will help to smooth out the fluctuations in the market. This can be a great way to invest what you can afford, and the money will slowly grow over time as it compounds.

Despite the excellent benefits that it brings, dividend reinvesting plans also come with a few downsides: Taxation Drip investing taxation is a relatively new concept, and there are still many unanswered questions about how it will work. However, there are a few things that we do know.

One of the biggest questions surrounding dividend reinvesting is taxation. Drip investments will be taxed as regular income, and you will need to declare your drip investments on your tax return. The tax rates for drip investments have not been announced yet, but they are likely to be higher than traditional stock investments since they will be considered as regular income.

Lack of Diversification One of the biggest downsides to drip investing is that it can lead to a lack of diversification. DRIPs Benefit 3: The power of compounding adds up fast However, the third big reason to reinvest dividends, and the less obvious one, is actually the most powerful. This table shows how your dividend income and the size of your investment will change over the first year. Ninety-four cents may not seem like a lot, which is why the second important force at work here is time.

One-hundred thirty-two dollars and eleven cents of that is thanks to your dividends on dividends. If you buy a Dividend Aristocrat that increases its dividend every year, your returns improve at every step. Of course, if you buy a stock that does goes up over 30 years as most of them do! While your reinvestments will occur at higher prices, the capital appreciation on those new shares more than makes up for it.

DRIPs Drawback 2: You may need to reallocate your positions You might also choose to stop reinvesting your dividends for allocation reasons. Higher-yielding positions will grow faster, which can throw your allocations out of whack pretty quickly.