Delaying reinvestment of dividends
From Bogleheads
Delaying reinvestment of dividends incurs a small amount of opportunity cost, which is one of the drawbacks of taking dividends in cash to simplify tax lot accounting or meet some other goals. This page calculates a possible effect of delaying reinvestment of dividends.
Yearly opportunity cost
If we assume an investment with 8% total return and 2% dividend yield, then delaying reinvestments of each dividend distribution by a month (to possibly combine with new money) costs:
2% * (8% / 12) = 1.33 basis points/year
Note that if you have a paycheck monthly, invest a part of one as soon as you receive it, and combine dividends with the new money, the maximum delay for the dividend reinvestment is one month.
Effect on the accumulation phase
How does this opportunity cost compound in 40 years with the following assumptions?
- You invest $10,000 for 40 years.
- You don't pay tax on dividends (for simplicity).
- You get 8% total return.
- Delaying reinvestments of dividend distributions by one month.
- You do not do tax loss harvesting.
| Year | Contribute | Total (Reinvest) | Total (Do not reinvest) |
|---|---|---|---|
| 0 | $10,000.00 | $10,000.00 | |
| 1 | $10,000.00 | $20,800.00 | $20,798.67 |
| 2 | $10,000.00 | $32,464.00 | $32,459.79 |
| 3 | $10,000.00 | $45,061.12 | $45,052.24 |
| 4 | $10,000.00 | $58,666.01 | $58,650.41 |
| 5 | $10,000.00 | $73,359.29 | $73,334.63 |
| 6 | $10,000.00 | $89,228.03 | $89,191.62 |
| 7 | $10,000.00 | $106,366.28 | $106,315.06 |
| 8 | $10,000.00 | $124,875.58 | $124,806.09 |
| 9 | $10,000.00 | $144,865.62 | $144,773.93 |
| 10 | $10,000.00 | $166,454.87 | $166,336.55 |
| 11 | $10,000.00 | $189,771.26 | $189,621.29 |
| 12 | $10,000.00 | $214,952.97 | $214,765.71 |
| 13 | $10,000.00 | $242,149.20 | $241,918.34 |
| 14 | $10,000.00 | $271,521.14 | $271,239.55 |
| 15 | $10,000.00 | $303,242.83 | $302,902.55 |
| 16 | $10,000.00 | $337,502.26 | $337,094.37 |
| 17 | $10,000.00 | $374,502.44 | $374,016.97 |
| 18 | $10,000.00 | $414,462.63 | $413,888.46 |
| 19 | $10,000.00 | $457,619.64 | $456,944.35 |
| 20 | $10,000.00 | $504,229.21 | $503,438.98 |
| 21 | $10,000.00 | $554,567.55 | $553,646.97 |
| 22 | $10,000.00 | $608,932.96 | $607,864.91 |
| 23 | $10,000.00 | $667,647.59 | $666,413.06 |
| 24 | $10,000.00 | $731,059.40 | $729,637.25 |
| 25 | $10,000.00 | $799,544.15 | $797,910.95 |
| 26 | $10,000.00 | $873,507.68 | $871,637.44 |
| 27 | $10,000.00 | $953,388.30 | $951,252.22 |
| 28 | $10,000.00 | $1,039,659.36 | $1,037,225.56 |
| 29 | $10,000.00 | $1,132,832.11 | $1,130,065.31 |
| 30 | $10,000.00 | $1,233,458.68 | $1,230,319.87 |
| 31 | $10,000.00 | $1,342,135.37 | $1,338,581.42 |
| 32 | $10,000.00 | $1,459,506.20 | $1,455,489.46 |
| 33 | $10,000.00 | $1,586,266.70 | $1,581,734.56 |
| 34 | $10,000.00 | $1,723,168.04 | $1,718,062.43 |
| 35 | $10,000.00 | $1,871,021.48 | $1,865,278.35 |
| 36 | $10,000.00 | $2,030,703.20 | $2,024,251.92 |
| 37 | $10,000.00 | $2,203,159.45 | $2,195,922.18 |
| 38 | $10,000.00 | $2,389,412.21 | $2,381,303.18 |
| 39 | $10,000.00 | $2,590,565.19 | $2,581,489.93 |
| 40 | $10,000.00 | $2,807,810.40 | $2,797,664.94 |
The difference comes out to be 0.36% of the fund balance in the taxable account.
The difference may be smaller in the following situations:
- You contribute more just before retirement (possibly because you are earning your peak salary and/or done with funding children's college education).
- You arrange the fund company to send dividends to a money market fund or an interest baring bank account.
How to Cite
You can link to this page from the Bogleheads Forum by copying and pasting the following text into your forum posting:
Please see [url=http://www.bogleheads.org/wiki/Delaying_reinvestment_of_dividends]Delaying reinvestment of dividends[/url] on the [url=http://www.bogleheads.org/wiki/Main_Page]Bogleheads Wiki[/url].
| Notice something that needs correcting? Notify a wiki editor or become a wiki editor and fix it yourself! |
|---|
| Tax Considerations | |
|---|---|
| Tax Basics | Tax Basics • Tax News Sources • Foreign tax credit |
| Strategic Tax Considerations | Principles of Tax-Efficient Fund Placement • Tax-Adjusted Asset Allocation |
| Tax Management | Whether to Reinvest Dividends in a Taxable Account • Delaying reinvestment of dividends • Timing of transactions to reduce taxes • Placing Cash Needs in a Tax-Advantaged Account • Donating Appreciated Securities |
| Tax Loss Harvesting | Tax Loss Harvesting • Wash sale • Cost basis methods • Specific Identification of Shares |
| Tax Data | IRS Tax Statistics • Vanguard Funds: Distributions |
