A Buy and Hold investment strategy includes reinvesting dividends into additional shares to benefit from compounding.

• A. Take dividends as cash profits
• B. Dividends are taxed separately
• C. Reinvest dividends to buy more shares
• D. Do not reinvest dividends

Answer: (C)

When you reinvest dividends, you buy more shares with the cash you receive instead of taking it as profit. This creates compounding: the new shares earn their own dividends, which can be reinvested again to buy even more shares, and so on. Over time, this accelerates growth because your investment base and the dividends it produces grow together, leading to higher total returns than simply taking cash dividends. So reinvesting dividends aligns with a Buy and Hold approach by continually expanding the amount invested and enhancing future income and potential price gains. Taking dividends as cash reduces this growth path, and other notes about taxes don’t change the fact that reinvestment maximizes the compounding effect.