# Delaying reinvestment of dividends

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 bearing bank account.