DO I KEEP MY DIVIDENDS OR REINVEST THEM?

Investors are not required to receive their dividends. Instead, they can have them reinvested into their funds. They use automatic reinvestment plans for this. If you opt for an automatic reinvestment plan on your mutual fund application form, your fund will invest the dividends for you. Most funds will automatically enroll an investor for automatic reinvestment if they do not make a distribution election.

Most funds do not charge a fee for this service. Funds that do charge them make that fact clear in their prospectuses. Soon after a fund makes a dividend reinvestment, it notifies each shareholder with a confirmation statement. The statement notes the amount of the distribution, the number of shares bought, the price at which each share was purchased, and the new total number of shares the investor owns.

Investors who like to receive current income usually prefer to receive their dividends. Investors who want to see their funds grow often prefer to reinvest their dividends. Over time, reinvesting dividends can add substantially to the value of a fund as the result of compounding.

If you reinvest your dividends, they will still be taxed as income, unless they are part of certain types of qualified retirement plans.

Let's conclude by summing up what we have learned about mutual fund returns.