ELI5 - automatic divident reinvestment

[badatmath]

It seems that I read somewhere(?) you should not automatically reinvest dividentds. . . Why would that be. This is for a balanced, taxable mutual fund. Unable to correct my title spelling sorry. I am already reinvesting but I could change.

 

[ownyourfuture]

I can't think of any reason not to ?

 

[samclem]

It seems that I read somewhere(?) you should not automatically reinvest dividentds. . . Why would that be. This is for a balanced, taxable mutual fund. Unable to correct my title spelling sorry. I am already reinvesting but I could change.

In the case of money in a taxable account, there are a couple of reasons some people choose to avoid reinvesting dividends:
1) Rebalancing: Some people have dividends go to a holding account (money market fund, etc) until they rebalance their holdings. This prevents the money from being reinvested in an asset that might already be overweighted according to their allocation plan. If they let the dividends be re-invested, they would have to pay short-term cap gains taxes on any appreciation if withdrawn in less than a year, or they would have to choose other (possibly more heavily appreciated) shares to sell.
2) Withdrawals: Some people put dividends in a money market fund, etc and save them there until they withdraw them for their annual spending. There won't be fluctuations in their value there, so the amount available is stable. Also, they can be withdrawn from the MM account without any capital gains and resulting taxes.

If a person isn't subject to cap gains taxes (e.g. taxable income below the top of the [-]15%[/-] 12% bracket) then I can't think of a very good reason not to reinvest dividends, unless it gives a person some comfort to "lock in" their value for some reason.

 

[badatmath]

Thanks, Samclem.

 

[donheff]

I take all of my annual withdrawals from taxable equity funds and am already in CG tax range due to pension income. I first withdraw the dividends (which are going to be taxed in any event) and then liquidate shares as needed to make up the difference. If I reinvested the dividends and then turned around and withdrew that amount of shares (I use average cost basis) I would take a double tax hit.

 

[clobber]

I have seen some people say the frequency of dividends can be problematic for tracking performance. They would rather lump it all together for one transaction a year.

 

[donheff]

How do people who use actual share cost handle this. I dollar cost averaged in biweekly deposits and reinvested dividends for years. When I finally needed to sell some shares I looked at the confusion and clicked on average cost basis. If you want to track actual cost basis it would seem logical to accumulate dividends in a MM and periodically purchase larger volumes of shares, Same with periodic savings.

Or, if you trickle the purchases in bi-monthly and reinvest dividends do most of the modern platforms offer some way of filtering for and selecting shares with the least growth or largest loss?

 

[LOL!]

Some people would not use a balanced fund in a taxable account because it is less tax-efficient than a straight-up equity fund that is passively-managed, had a low-expense ratio, distributes no capital gains, and pays only qualified dividends.

A balanced fund reduces tax-loss harvesting (TLH) opportunities, too. Sometimes a reinvested dividend can create a wash sale out of a TLH transaction.

I used to automatically reinvest distributions in my taxable account, but now I either manually reinvest or spend them.

 

[badatmath]

Some people would not use a balanced fund in a taxable account because it is less tax-efficient than a straight-up equity fund that is passively-managed, had a low-expense ratio, distributes no capital gains, and pays only qualified dividends.

I wasn't that smart when I bought it nearly 30 years ago. . . One of my less than optimal choices. One of many I'm afraid. Which is why I may have to work until I am 110.

 

[CardsFan]

I wasn't that smart when I bought it nearly 30 years ago. . . One of my less than optimal choices. One of many I'm afraid. Which is why I may have to work until I am 110.

We all have made "less than optimal choices". In my case, I have exactly your issue. While working, I continued to re-invest. Since retiring, I have all interest, dividends and cap gains put in to cash. Since I need to pay taxes anyway, I might as well spend them.