Dividend Reinvestment Plan (DRiP) is the process of automatically reinvesting dividends received into additional whole and fractional shares of the company.
Growth is a part of our daily lives. We all seek growth in different forms, whether you’re a local farmer, a small business owner or an investor looking to build your savings for the future. Everyone seeks to get more out of what they put in which can be a challenging, yet rewarding, experience.
The decision on how and when to invest is a top priority for many people as they begin to take a closer look at their financial future and the potential to see growth in their current portfolios. The Dividend Reinvestment Plan or DRiP, offered by TD Ameritrade, is a convenient and innovative way to potentially grow your investing account. DRiP is the process of automatically reinvesting dividends received into additional whole and fractional shares of the company’s common stock. With DRiP at TD Ameritrade, clients aren't charged additional fees or commissions to reinvest, and can choose to opt in or out of DRiP at any time. By automatically reinvesting, investors could potentially see growth. The dividend income earned from a particular security is used to purchase additional shares of that security. Each purchase is considered a new tax lot (think of it just like any other buy transaction) with its own basis and purchase date. The dividend income will be reported on a 1099-DIV for taxable accounts, regardless if it is reinvested or not. DRiP can possibly be a great way to build your savings over time without getting “knee deep in the dirt” of full time investing. Sorry, a little farmer humor.
Got your attention? Let’s look at how easy it is to enroll in DRiP for your TD Ameritrade account.
FIGURE 1. DIVIDEND REINVESTMENT.
Log in to your account at tdameritrade.com and go to My Account > Dividend Reinvestment.
FIGURE 2. DIVIDEND REINVESTMENT OVERVIEW PAGE.
Click on the link, Enroll/Edit, for each category.
FIGURE 3. ENROLLMENT OPTIONS.
Select the appropriate enrollment option.
Voila, you’re finished!
Note: If you prefer to enroll in DRiP over the phone, you can give us a call 800-669-3900 and an associate can process the enrollment of securities for you.
Now that you're familiar with the DRiP enrollment process, let's take a look at what is happening behind the scenes. Once you're enrolled in DRiP, you can log in to your account to check on your recent dividend reinvestment payment and you'll find multiple entries for your security.
Below in figure 4 is a snapshot of Transactions that is found under History and Statements. Notice the dividend income and then on the very same day a purchase for the same amount — that's the DRiP!
FIGURE 4. SNAPSHOT OF TRANSACTIONS.
To access Transactions, click on History and Statements.
When you visit Gain/Loss under My Account, expand the position history by clicking on the green circle next to the security name. Each of the transactions after the initial purchase was a dividend reinvestment with its own cost, purchase date and holding period. Remember, these are just like any other buy transaction. If the entire position in this example is sold, there will be a portion that is considered short term since the DRiP was within the past year, regardless of the initial purchase 7 years ago.
FIGURE 5. SNAPSHOT OF GAIN/LOSS.
To access Gain/Loss, click on My Account.
Ok – time to be serious, talking tax now!
No such thing as a free lunch, right? Even though TD Ameritrade has no fees, charges, or commissions in DRiP – there is still a tax scenario to be aware of. If DRiP is active in a non-retirement account, the dividend income is a taxable event and will be reported on your 1099-DIV as if it was received in cash.
If you are not dependent on your dividend income, consider letting it be used to cultivate your savings by enrolling in DRiP. This investing technique may not be suitable to all investors. Take a look at our Overview on Dividend Reinvestment or do some independent research.
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