What is a Dividend Rollover Plan?

Dividend rollover plan is another, rarely used way to refer to a Dividend Reinvestment Plan (DRIP).

Unfortunately just reinvesting dividends in a systematic way will not get you out of any tax implication associated with the dividends attributed to your account. An automatic dividend reinvestment plan (DRIP) is an option in some investment accounts and financial products. Any dividends paid out will be reinvested in the same mutual fund, ETF, or stock at the earliest possible opportunity.

Most companies who pay regular dividends do so on a quarterly basis, so you’ll be buying shares a few times a year with a DRIP. This can be good, following the logic of Dollar Cost Averaging (DCA), which suggests that investing incrementally instead of in one lump sum will have higher probability of getting a better average price per share.

Dividend-paying companies have strong historical returns, especially when dividends are reinvested. Without reinvesting, you miss out on the compounding effect that the dividends would add. Dividends will still be taxable to the investor every year if they are not part of a tax-deferred account such as an IRA.

They tend to be taxed a short-term capital gains rates, which is effectively the investor’s income tax bracket.