Save and Conquer

There are several schools of thought on automatic dividend reinvestment. In many cases it is a good idea to just allow dividends to be automatically reinvested. One of the biggest advantages is that it keeps your money invested and continues to buy shares at the best prices. You get the best price with automatic reinvestment because you normally do not have to pay the standard purchase fees. Automatic reinvestment also dollar cost averages into more shares of the fund or stock over time, thus keeping you fully invested.

There are a few times in a taxable investment account when it is better to take dividend distributions in cash, and then manually reinvest them. These are spelled out in the Bogleheads wiki. To quote the pros:

• If you are planning to use Specific Identification of Shares, taking dividends in cash avoids creating a lot of small tax lots. You can invest dividends along with new money.
• If you are planning to do Tax Loss Harvesting, automatic reinvestments of dividends may accidentally trigger a wash sale.
• If you are investing a relatively small amount of new money compared to the dividends you receive, taking dividends in cash may better facilitate rebalancing because you can choose not to put any new money (including dividends) into an outperforming fund.
• If you have difficulty maxing out tax-advantaged accounts from your paycheck, and taking dividends from your taxable account would allow you to max out your tax-advantaged accounts, you may want to take dividends in cash and use the cash to max out your tax-advantaged accounts. (This situation may apply to investors who have inherited a large taxable account, or have built a large taxable account, ignoring the benefits of tax-advantaged accounts for many years.)
• If your taxable account has a fund that is less than ideal but remains a suitable holding, you might want to take dividends in cash from that fund. For example, if you have Vanguard 500 Index Fund with a large amount of unrealized capital gains, and your asset allocation calls for Vanguard Total Stock Market Index Fund for domestic stocks, you may want to take dividends from Vanguard 500 Index Fund in cash to prevent it from growing faster than Vanguard Total Stock Market Index Fund.

Since I always set my tax deferred accounts to do automatic dividend reinvesting, I had done the same for taxable accounts. I figured out the above several years ago, and now use the cash from dividends along with new money, to rebalance every quarter.

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