Your mutual fund or other investment vehicle pays a dividend on the regular. What do you do with it?
Well, you could receive it in cash and go out there and spend it like a don. Or, you could set up automatic reinvestment, which just buys more shares of the mutual fund with the dividend proceeds you'd be distributed.
The bad news: You'll be taxed on those dividend distributions at the end of the year and have to pay cash taxes on them. The good news: The investment will compound at a much higher rate with those divvys reinvested. And in most fund complexes, there is no commission on those incremental purchases. Woot. ish.
Related or Semi-related Video
Finance: What is a Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]
Up Next
A Keogh Plan is an IRA for self-employed people. Oh. Did we just spoil this video? You should still watch it...we put a lot of work into it...
What is Automatic Reinvestment? Automatic reinvestment means that all of the money that investors make, “capital gains,” is reinvested into the...
What is a 401(k)? A 401(k) is a retirement plan that is offered by many employers (government entities, however, use a 403(b) plan). These plans us...