A common dilemma for most of the long-term investors is whether to participate in DRIP (Dividend Re-Investment Plan).
For starters who are not familiar with DRIP: DRIP allows you to reinvest the dividends back onto the same stock automatically each time the dividend is paid out. So instead of getting cash, you get fractional shares based on the share price on the payment date. There are a couple of advantages with doing this:
- If you are a long-term investor who believes in the company fundamentals, then this allows you to increase your holdings on the company without spending any time or money. This happens automatically and you don’t have to micro manage. Gives peace of mind knowing that you are investing in stocks picked by you automatically and regularly.
- Also by doing this, at lower prices, your dividends will get you more stocks and at higher prices you get less stocks. Hence it enables you to dollar cost average automatically, though this is very negligible since the amount of stocks that you get through DRIP is definitely much less compared to your overall holdings. But still over a period of time, this happens slowly and steadily.
- You get to buy stocks without incurring any commissions.
But there are some disadvantages too by doing DRIP.
- If you are holding a stock that is already a huge percentage of your portfolio, you wouldn’t want to increase it even more by doing DRIP. You would want to use that cash to diversify.
- Also, if you think the stock is overvalued, you wouldn’t want to invest the dividends getting more of the stocks at a valuation that you think is not reasonable.
With respect to DRIP, there is no right or wrong answer. Like most options in investing, this depends on your risk appetite and amount of time you are willing to spend to manage your investments.
Personally, I don’t do DRIP for a couple of reasons:
- I like more options on what to invest in and when to invest. DRIP doesn’t give me these options.
- Also, my trading account is with Scottrade and they don’t offer DRIP.
Scottrade offers something else called FRIP (Flexible Reinvestment Plan) which I will explain in a later post.