Auto-Investing Dividends With Fidelity: A Step-By-Step Guide

If you're looking to auto-invest your dividends with Fidelity, you're in luck! Fidelity offers a Dividend Reinvestment Plan (DRIP) that allows investors to automatically reinvest their dividend payments into additional shares or mutual funds without incurring any commission fees. This is a great way to compound your returns and accelerate the growth of your investments over time.

To set up DRIP with Fidelity, you'll first need to log in to your individual account on their website. From there, you can select Accounts & Trade and then Account Features. Under Brokerage & Trading, choose Dividends and Capital Gains. You can then change your preference by clicking Update for the specific security or mutual fund you want to modify. Select Reinvest in Security and confirm your changes.

Fidelity also offers the Automatic Investment Program (AIP) which allows you to regularly invest a set amount in your chosen investments, including dividend reinvestment. This program streamlines the investment process and helps investors stay disciplined with their strategy.

With these tools, you can efficiently reinvest your dividends and take advantage of the power of compounding to build wealth over time.

Dividend Reinvestment Program (DRIP)

A Dividend Reinvestment Program (DRIP) is a convenient way to compound your returns without manually reinvesting your dividends. By enrolling in a DRIP, you can take advantage of the power of compounding, allowing your earnings to generate additional earnings over time. This strategy is particularly beneficial for long-term investors looking to maximize their investment growth and capitalize on the benefits of reinvesting dividends.

Enrolling in Fidelity's DRIP is straightforward and can be done online through the account management portal. Once enrolled, any cash dividends received from stocks will be automatically reinvested into purchasing additional shares of the same security, thus increasing your overall investment. This process can significantly boost your overall returns on the investment and is a smart way to harness the power of your earnings, steadily building wealth over time.

It is important to note that dividend elections must be in place on the record date of the announced dividend. If the election is made after the record date, the updated settings will only apply to future dividends.

Automatic Investment Program (AIP)

The Fidelity Automatic Investment Program (AIP) is a great option for those looking to regularly invest their dividends and make scheduled investments into a variety of Fidelity mutual funds. This program is designed to streamline the investment process by automating contributions, helping investors stay disciplined with their investing strategy.

By enrolling in the AIP, investors can benefit from dollar-cost averaging, which spreads out investments over time, potentially reducing the impact of market volatility. The program offers flexibility, allowing investors to adjust their investment amount and frequency based on their financial goals and risk tolerance. This customizable approach enables investors to build their portfolios in a way that aligns with their specific needs and preferences.

To enroll in the AIP, investors can follow these steps:

• Log in to your Fidelity account.
• Navigate to the "Accounts & Trade" menu.
• Select "Account Features".
• Choose "Brokerage & Trading" from the options.
• Click on "Dividends & Capital Gains".
• Update your dividend elections for a single position or for the account as a whole.
• Select "Reinvest in Security" for the desired position(s).
• Check the box for "All equity positions currently held in this account" if you want the AIP to apply to your entire portfolio.
• Optionally, check the box for "Future equity purchases, transfers, and deposits to this account".
• Save your settings by clicking "Update".

It's important to note that any changes made to dividend elections must be in place on the record date of the announced dividend. If changes are made after this date, the updated settings will only apply to future dividends.

Tracking performance

Tracking the performance of your auto-invested dividends on Fidelity is a crucial aspect of managing your investments effectively. Here are some detailed instructions and tips to help you track your dividend performance using the Fidelity platform:

Utilize the Fidelity App:

The Fidelity App offers a convenient platform for managing your investments and tracking the performance of your dividends. Here are the steps to follow:

• Login and Security: Start by logging into your Fidelity App account using your credentials. Fidelity provides security measures such as two-factor authentication to protect your account.
• Navigate to the "Accounts" Tab: Once logged in, access the 'Accounts' tab by tapping on the menu icon in the top left corner. This is where you'll find a comprehensive list of your investment accounts, including dividend information.
• Select the Specific Account: Choose the specific investment account you want to examine for dividend information. This ensures you're viewing dividends attributed to that particular investment vehicle.
• Click on the "Transactions" Tab: Within the selected account, click on the 'Transactions' tab to access the detailed transaction history, including dividend payments and related activities.
• Identify Dividend Transactions: Look for specific terms like 'dividend payment' or 'dividend received' in the transaction descriptions to identify dividend transactions. You can also sort transactions using filters like date range or transaction type.
• Analyze Dividend History: Explore the 'Dividend History' feature to access a comprehensive record of past dividend payments. This enables you to track dividend performance over time and analyze the consistency of dividend payments.
• Set Up Dividend Alerts: Navigate to the 'Alerts' section and select 'Manage Alerts' to customize your alerts. Choose 'Dividends' as the alert type and set your preferences for frequency and thresholds.
• Use the 'Dividend Calendar' Feature: The 'Dividend Calendar' feature allows you to track upcoming dividend schedules, payment dates, and other dividend-related events. This helps you stay informed about your expected investment income.

Explore the "Accounts & Trade" Menu on the Website:

If you prefer using the Fidelity website, you can track dividend performance through the "Accounts & Trade" menu:

• Select "Accounts & Trade": On the Fidelity website, select the "Accounts & Trade" menu, followed by "Account Features."
• Expand "Brokerage & Trading": Choose the "Brokerage & Trading" option and then select the "Dividends & Capital Gains" link. Here, you can update your dividend elections for a single position or for the account as a whole.
• Update Dividend Elections: To update dividend elections for a single position, click "Update" next to the desired position. You can choose between "Deposit to Core Account" or "Reinvest in Security." For the account as a whole, follow similar steps and check the appropriate boxes under "Apply to."
• Understand Timing: Keep in mind that dividend elections must be in place on the record date of the announced dividend. Changes made after the record date will only apply to future dividends.

Analyze Your Performance Page:

Fidelity's Performance page provides valuable insights into how your portfolio of investments is performing, as well as the impact of market activity and your own actions on your balance over time. Here's how you can use it:

• Interpret Returns: Understand the difference between Personal (money-weighted) and Investment (time-weighted) Rates of Return. Personal Rate of Return considers your investment decisions, while Investment Rate of Return focuses on the performance of the underlying investments.
• Select a Benchmark: Choose an appropriate benchmark that represents the segments of the market you're heavily invested in. This helps you compare your returns with similar investments.
• Evaluate Performance Drivers: Review the graph and table on the Performance page labeled "What drove your change in balance?" to gain a detailed breakdown of changes such as account deposits, withdrawals, and investment gains or losses.
• Frequency of Updates: Pre-tax account performance returns for the previous month will typically be available by the third business day of each new month.

By utilizing the tools and features provided by Fidelity, such as the mobile app, the "Accounts & Trade" menu, and the Performance page, you can effectively track the performance of your auto-invested dividends and make informed investment decisions.

Full vs partial DRIP

Fidelity offers different dividend reinvestment options, including full dividend reinvestment, partial dividend reinvestment, and cash payout. Here's a closer look at the differences between full and partial DRIP:

Full Dividend Reinvestment: With full dividend reinvestment, investors can choose to reinvest the entire amount of dividends received back into purchasing additional shares of the company's stock, thereby compounding their investment. This strategy allows investors to maximize their investment performance and benefit from the magic of compounding returns. By reinvesting the entire dividend amount, investors can accelerate their investment growth over time.

Partial Dividend Reinvestment: Partial dividend reinvestment allows investors more flexibility and customization. With this option, investors can choose to reinvest a portion of their dividends while receiving the remaining portion as a cash payout. This approach provides a balance between growing their investment and having immediate access to cash. Partial dividend reinvestment enables investors to navigate market volatility and optimize their investment returns based on their financial goals and preferences.

When deciding between full and partial DRIP, investors should consider their investment goals, risk tolerance, and cash flow needs. Full dividend reinvestment is ideal for those seeking maximum compound growth and are comfortable with a fully automated approach. On the other hand, partial dividend reinvestment is suitable for those who want to maintain some control over their cash flow and have the flexibility to allocate funds as needed or explore other investment opportunities.

Tax implications

When considering dividend reinvestment, it is crucial to understand the associated tax implications to make informed decisions and optimize your after-tax returns. The tax treatment of dividends and capital gains can significantly impact your overall investment returns.

Firstly, it is important to differentiate between qualified and non-qualified dividends. Qualified dividends, which include most dividends paid by domestic companies and many foreign companies, are taxed at preferential rates known as capital gains rates. The capital gains tax rate depends on the investor's modified adjusted gross income (MAGI) and taxable income. The current capital gains tax rates are 0%, 15%, 18.8%, 20%, and 23.8%. On the other hand, non-qualified dividends are taxed at ordinary income tax rates, which can be higher.

Additionally, certain types of investments, such as distributions paid by real estate investment trusts, master limited partnerships, and other similar "pass-through" entities, may not qualify for the preferred tax status of qualified dividends. Furthermore, dividends paid on shares that are not held for at least 61 days in the 121-day period surrounding the ex-dividend date are also considered non-qualified dividends.

When choosing between different dividend reinvestment options, such as dividend reinvestment plans (DRIPs), stock dividends, or selling shares for cash, it is essential to consider the distinct tax implications of each option. For example, DRIPs may trigger tax liabilities on the reinvested dividends, while receiving stock dividends may have different tax treatment compared to cash dividends. Understanding these nuances can help investors make tax-efficient decisions and maximize their after-tax returns.

Moreover, it is worth noting that interest earned from money market accounts, bank certificates of deposit (CDs), and bonds is taxed at ordinary tax rates. This means that individuals in the top tax bracket could pay taxes of up to 37% on interest payments. In contrast, the maximum tax rate on qualified dividends is 23.8%, resulting in significantly better "after-tax" returns compared to interest income.

Therefore, when comparing investments for cash flow, it is advisable to consider both pre-tax and after-tax yields. By taking into account the tax implications, investors can make more informed decisions and optimize their investment strategies accordingly.

Frequently asked questions