Over the last few days, I have seen a few discussion threads about whether it is better to utilize a dividend reinvestment plan (DRIP) versus receiving dividends in cash, thus allowing the investor the choice of where to invest those funds.
As an investor that is currently leveraging the DRIP approach, I was a little surprised by the number of people that were taking the approach to have control over where their dividends were reinvested.
Wondering if I was in the minority, I decided to run a quick Twitter poll to see what others were thinking.
With slightly more than 200 votes at the time of writing, I am in the minority as only 38% of those polled are utilizing a DRIP to automatically reinvest their dividends.
Why Choose DRIP?
Despite being in the minority, I believe that choosing to utilize a DRIP is beneficial for my dividend portfolio for a number of reasons, including the following:
- No Trading Commission :: While I currently have a bulk of free trades that I received when opening my DGI account with Fidelity, I am able to save those trades for ongoing purchases because reinvested dividends do not incur any transaction fees.
- Automation :: Whether it is with my dividend tracking spreadsheet or scheduled deposits, I am a fan of automation. By leveraging a DRIP, I am automatically building my position in each stock over time.
- Removing Personal Biases :: Some may call it emotion, or even hint at timing the market, but by having my dividends automatically reinvested it removes the potential to over-think the trade and make decisions that are detrimental to the long-term success of my portfolio.
Keith over at DivHut has a good article on the benefits of DRIP investing and covers a number of benefits in more detail.
In my mind, one of the appeals of dividend growth investing is how the wonder of compounding works to your advantage over time.
By no means is this only possible when using a DRIP approach, however my own personal fear is that be being too hands-on and self-directing the cash from dividends that I will negatively impact my long-term success.
I’ve searched high and low for a performance-based study that compares the two approaches, and unfortunately I have come up empty. Therefore, for where I am today with my dividend portfolio and being in the accumulation phase, I stand by my decision that using a DRIP approach is the best for me.
The No-DRIP Contingent
With over 60% of the responses preferring to receive dividends in cash, the most common rationale for this was that it gives the investor complete control over the funds being reinvested into their portfolio.
This is a very strong rationale and one that I cannot argue with.
When one receives dividends, the underlying stock may be over-valued at the time of payment. Therefore, those that are utilizing the automatic reinvestment of dividends will be receiving shares at an inflated value.
All things considered, it is advised to buy shares when a stock is under-valued or fairly valued–and with the DRIP you lost that control.
Another common reason provided as to why people do not DRIP was because their brokerage did not allow fractional shares. Some of the recently popular trading platforms like Robinhood come to mind, but also looking outside the confines of the United States, some brokerages in other countries simply don’t provide this capability.
Which is Best, DRIP or No-DRIP?
With all of the feedback considered and the benefits of each option, which one is the best approach?
Everyone’s favorite answer…it depends.
It really does depend on so many factors and influences beyond just the numbers, which as I mentioned don’t appear to be readily available in comparing the two options.
For those that prefer more of the “set it and forget it” approach and want to see their dividend machine grow over time, I would definitely recommend the DRIP approach. However, those that are true value investors and want to be more actively engaged might benefit from the more hands-on approach of choosing where to invest dividends.
The best part is that you are never stuck with one approach or the other, unless of course your brokerage doesn’t offer the choice.
There are some that have utilized one approach during a particular phase of their life and then have transitioned to the other approach. Tom over at Dividends Diversify is one that comes to mind that used DRIP extensively at one point but has been more selective over the years.
As stated earlier, for me personally and where I am in the process right now, using a DRIP is the correct choice; however, that doesn’t mean it will be the right choice forever.
Do you prefer to manually choose how to reinvest dividends?
Or, do you DRIP?
I have some I drip but most I have started collecting the dividend. That way I can target stocks that drop and are undervalued but also bring up the stocks in the bottom of my portfolio.
Thanks for the feedback Doug. That is the beauty that the approach can really tailor to your own personal goals for your portfolio. If I weren’t adding new capital on a monthly basis I might be more inclined to choose where I reinvest, but for the time being I am focusing the new capital on the undervalued positions and letting the dividends reinvest.
As I get closer to retirement, I am likely to begin that transition.
M1 Finance is my brokerage and it allows me to automatically reinvest my funds to all my holdings. While it is not truly a DRIP brokerage, more like a hybrid DRIP, I am allowing the funds to be reinvested over a certain dollar figure.
When it comes to DRIP, you are on point with both sides of the choices you provided on your poll.
For those that automatically invest, like me, we just want to dollar cost average as best as we can. For those with M1 Finance, we’re doing DCAs across all stocks we own through automatically reinvesting the cash in our accounts. With other brokerages, it only DRIPs into that one particular stock. Which in turn, leads to a counterpoint and the second choice as follows.
It is the reverse for those who want to hold the rest in cash and do the manual buys. I see that investors do not want to ruin their average and just spend the money earned in undervalued stocks in their portfolio or their watch list. Essentially, these investors are the ones that are looking for a good dividend yield at a good buy price.
The latter, of course, is similar to buying low and selling high–or timing the markets.
Hi Steve, thanks for stopping by!
The approach with M1 is like DCA on steroids as it spreads the investment out across the entire pie (isn’t it them that calls your portfolio a pie?). As mentioned on Twitter, I want to have my younger son start with them once they support custodial accounts so he isn’t paying transaction fees, gets benefit of reinvesting dividends, and can build up from nothing with small investments. They are supposed to introduce custodial accounts before the end of the year.
The pies are correct! You are doing something wonderful for your son and I do hope he learns and invests as much as you do!
That means a great deal Steve, thanks.
My younger son is far more interested than my older son, and he has taken to researching stocks and discussing investing with me. I’ve given him access to an old Roth so he can gain a little hands-on experience too. He’s interested in studying finance in college.
My older son is not as interested, I have been able to get him to start an IRA and he chose to go with an ETF as he has no interest in researching individual stocks or being overly hands-on.
Trying to do the best I can to help set them up for success, and instilling the habits that will lead them to financial independence as early in their life as they desire.
Good post. One of my email subscribers asked me to write about this. I will forward it on to him since I can’t cover it much better than you have DD. Tom
Thanks Tom, that means a lot.
I prefer to DRIP. Although I currently have one stock (OHI) where I just collect the dividend and add it to my cash pile, as it’s not a position I currently wish to let grow since it already provides an outsized dividend relative to it’s portfolio weight.
I’m a little surprised by the results of your Twitter poll as well, DivvyDad. I would have guessed you’d have a larger percentage for DRIP. For compounding sake, at least the dividends get reinvested in either case.
From what I recall, the DRIP votes had taken an early lead in the poll but then started to fade. Your last note raises a point that I probably should have had at least one additional option, and that would be no reinvestment as the dividends are providing living expenses.
I really don’t have a choice since my broker does not support DRIP 🙂
But even if I had a choice I would received the divvies in cash and make my own choices just like I do now.
Thanks for sharing Mr. Robot, and that is good that your personal choice aligns well with the limitation imposed by your broker. 🙂
Really enjoyed your post and reading all the comments, thanks for deciding to write about this and that you actually made a poll.
I’ve often wondered which approach I would take. Currently, I collect my dividends in cash and simply buy the same security, but want to transition my my registered accounts into synthetic DRIPs (Questrade), however, my non-registered account (Margin) I will only keep it as cash, otherwise it will complicate the calculating of the ACB further and I prefer things simple.
Thanks for stopping by MH and sharing your current approach. There is a lot to be said for keeping things simple, which I highly recommend!
Because I only have a brokerage account through Robinhood at this point, I manually reinvest my dividends as there is no DRIP option through Robinhood as of yet. This is one of the few drawbacks of Robinhood. For my full review of Robinhood after 1 year of use, feel free to stop by the blog.
Hey Kody, thanks for stopping by! That is one of the brokers that I thought about when mentioning that some don’t allow for DRIP, and I’ve learned that at least one in Canada doesn’t as well.
I’ll stop by and read your review, as I was looking at them or M1 for my son (leaning towards M1 as they do allow DRIP).
Great article on the benefits of the DRIP divvydad. I did one similar a while back and man was I shocked to see how much one can lose in investment gains solely from trade commissions. Setting the portfolio to DRIP is a great route to take. Especially when compounding is an objective.
Thanks Dr. D, and the commissions can definitely be a killer unless you save up until you have enough to keep the fee at a reasonable percent of the trade. The downside to that is it might take awhile to build up enough dividends to do that depending on the size of your portfolio / payouts.
For me, while heavily in the accumulation phase, I am utilizing the DRIP. Once I am ready to retire and will look to use the dividends as part of our income, I will change that as a default but imagine there will be some that I may still DRIP.
No dripping here.
Maybe it has to do with that emotion of control in reinvesting.
For me it is also the time spend to reevaluate and balance my portfolio before I place any new orders.
But it is definitely being in control.
Thanks for making us think about this matter,
Petra
Thank you for the feedback and for stopping by Petra!
That is a really interesting point about the emotional aspect of having control, and one that I haven’t explored in-depth. I do my best to remove the emotion from finances, which can certainly be difficult at times, and therefore had not really considered this connection previously.