Income · Investing Glossary
What Is Reinvestment?
Using investment income — dividends, interest, or capital gains — to buy more shares instead of cashing out.
The Full Definition
Reinvestment means automatically using the income an investment generates — dividends, bond interest, or capital gains distributions — to purchase additional shares rather than withdrawing the cash. Most brokerages offer a Dividend Reinvestment Plan (DRIP) that does this automatically and commission-free. Reinvestment is the engine behind compound interest: each reinvested dividend buys more shares, which then generate their own dividends, creating a snowball effect that accelerates the longer it runs.
Real-World Example
An investor holding $50,000 in a dividend-paying index fund with a 1.5% yield earns $750 in dividends the first year. Reinvested, that $750 buys more shares, which themselves generate dividends the following year. Over 30 years, reinvesting dividends rather than spending them has historically roughly doubled total returns versus collecting the cash.
Related Terms
- DividendA cash payment a company makes to shareholders, usually quarterly.
- Compound InterestEarning returns on both your original investment and your accumulated gains.
- Total ReturnInvestment performance including both price appreciation and income (dividends/interest).
- Dividend GrowthA company increasing the amount of its dividend payment year over year.