Thursday, July 14, 2011

Do You DRIP?

DRIP stands for Dividend Reinvestment Plan. This plan is offered by corporations as a way to reinvest cash dividends by purchasing shares or fractions of shares on the dividend payment date. A lot of retail investors participate in such plans as a way to cheaply reinvest dividends back into the company that paid them.

There are many benefits of participating in a DRIP. It allows you to build a sizable position over time through reinvesting your dividends. Some dividend reinvestment plans even discount the share price at time of reinvestment. Usually the plans come with no commission fees, or very low commission fees. It also allows you to buy fractional shares that wouldn't be available otherwise.

I don't personally DRIP.

Here's what I do:
 

I wait for my dividends to accumulate over the course of a month, as I usually invest once per month. I inject fresh capital into my brokerage account shortly after receiving my large commission check from my day job and combine that fresh capital with my dividends that I've received over the past month. I take these two combined sources of capital and invest it in the most attractively valued business available at the time of investment. This investment could be in the company that paid a majority of the dividends from the past month. It also could be a new company, that I don't have any investments with before time of purchase. It might be with a company that I currently have a position with, but didn't pay dividends in the previous month. The key is, it doesn't matter to me whether I reinvest the dividends back into the company that paid them. Once I receive the dividends in my brokerage account, I try to reinvest that capital in the best way I see fit.

Here's why I do it:

I don't DRIP because I like to have control of how I reinvest my dividends. If all my dividends were set on auto-pilot and reinvested themselves back into the company that paid them out I would feel a severe lack of control. I like to have control of my destiny and finances, whether it's for the best or not. Another reason I don't DRIP is because the company that paid the dividends may or may not be attractively valued on the day the dividend is paid. For instance, if Coca-Cola is trading for 30 times earnings on the day the dividend is paid I don't necessarily want to reinvest that dividend into Coke. I could probably find a better value in the market to reinvest that fresh capital into. There are also tax consequences to consider when participating in a dividend reinvestment plan, as the fees and commissions a DRIP administrator pays on the investors behalf counts as taxable income.

I can certainly see the benefits and the drawbacks to dividend reinvestment plan. I have decided that for me, personally, I would rather reinvest my dividends as I see fit.

What about you? Do you DRIP?

Thanks for reading. 


This article was written by Dividend Mantra. If you enjoyed this article, please consider subscribing to my feed.

4 comments:

  1. Mantra,

    I think you take the best approach. I plan on switching off my DRIPs as soon as my monthly dividend income crests $1,000. I would turn it off now, but my monthly contributions are volatile and I prefer to be as fully invested as possible.

    Best,
    Selling Theta

    ReplyDelete
  2. I never knew the fees and commissions were taxable.

    ReplyDelete
  3. Selling Theta,

    I like being fully invested as well, and I share your enthusiasm toward that end. DRIP's definitely help to be a means toward that end, but I feel the drawbacks outweigh the benefits as I like to reinvest as I feel fit.

    I wish you the best of luck on reaching $1,000/mo in dividends. That would be fantastic, and I'm quite sure you'll beat me!

    Take care and keep in touch!

    ReplyDelete
  4. Anonymous,

    If a DRIP administrator pays fees and commissions for you, this can be counted as income.

    All the best!

    ReplyDelete

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