Should i reinvest reit dividends

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Real estate investment trusts , or REITs, trade on exchanges like ordinary stocks. But they're unique in several ways. REITs are especially different from ordinary stocks when it comes to dividends. Not only do REITs tend to pay above-average dividends, but they also have several unique tax implications. Most REITs pay dividend yields that are significantly higher than average.

Consider this chart of the dividend yields paid by some of the largest publicly traded REITs. Source: CNBC. The average mortgage REIT which owns mortgage-backed securities and related assets pays around Annaly is a mortgage REIT.

Equity REITs produce a combination of stock price appreciation and income. Commercial properties generate rental income -- but they also tend to increase in value over time. On the other hand, mortgage-backed securities are purchased only for income. Mortgage REITs deliver the maximum amount of income within certain risk parameters. They have little or no regard for the appreciation potential of their assets.

They should be able to find this feature in their account settings menu. Once it's selected, investors usually have the following options:. Investors who chose to automatically reinvest all their current and future dividends will have a truly automated experience.

This program will add new stocks or funds to the plan as soon as they enter the portfolio. Likewise, when a company initiates a dividend, it will automatically get reinvested since the initial enrollment covers all current and future dividend payers.

However, if an investor enrolls only their current stocks or a portion of their portfolio in the plan, they will have to add new ones manually. Because of that, they need to carefully consider whether they want the convenience of full automation or to retain some control over how they allocate a portion of their cash dividends. There are many reasons why investors might consider reinvesting their dividends. It's easy to set up, usually commission-free, typically allows the purchase of fractional shares, and enables investors to put cash to work quickly.

However, the best reason to consider automatic dividend reinvestment is to benefit from the miracle of compounding. That return is the price growth only, as it assumes no dividends. However, adding in dividends changes the equation dramatically.

Given that much higher return potential, investors should consider automatically reinvesting all their dividends unless:. Cash dividends are usually taxable even if investors reinvest that money automatically through their brokerage account or via the company's DRIP. However, tax rates can vary significantly depending on the type of dividend paid qualified or non-qualified and an investor's taxable income. In addition to qualified dividends earned by investors in the lowest income bracket, another type of payout that isn't taxable is those paid in stock by companies that don't give investors an choice between cash and stock.

It also depends on your short- and long-term goals, your personality, and your need for funds. If you make a comfortable income and don't feel the need for a lifestyle upgrade, reinvesting your dividends to fund your retirement could make the most sense. If you choose to reinvest your dividends, you can still sell stock to cover unexpectedly large expenses; these could be items such as a child's education or a medical emergency.

On the other hand, what if you need a little extra income to supplement your job? Or what if you want to enjoy more experiences while you are young or for your family while your children are young? In that case, you could be better off using the dividend payments throughout your lifetime. The right choice for you also depends on your level of risk tolerance. In a best-case scenario, you can maximize the value of your investment by reinvesting your dividends.

But if the company goes under or the stock market crashes , you could lose your investment just when you need it most—without even having the chance to enjoy the benefits of your dividends along the way. Ultimately, whether you reinvest your dividends or spend them, you should be using your money and investment as tools to provide you with the highest possible balance of enjoyment and security throughout your life.

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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Alternative Investments Real Estate Investing. Key Takeaways Real estate investment trusts REITs are one area of the market still offering high-yield, safe dividends.

DRIPs automatically reinvest dividends in additional shares of the company, which offer the power of compounding interest.