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?