Tuesday, March 6, 2007

Re-Investing Dividends

Should you re-invest dividends or take the cash? You often hear about the benefits of enrolling in DRIPs (and I agree with all of them) but today I’m going to present an alternative view of reinvesting dividend and explain why personally I take the cash.

The main reason I chose cash over the DRIP plan is that I like to determine the price at which I buy a stock. Additionally, I plan on keeping most of my dividend paying stock indefinitely and the DRIP programs would result in many of my holdings becoming too large a percentage of my portfolio. For example, TD is already approximately 14% of my portfolio and I’ve held it for 5 years however if I’d been in the DRIP it would probably be around 17% or 18% (and growing). Instead I took the dividends and reinvested them in other high paying dividend stocks (when I thought they were on sale). If there ever reaches a point where a dividend paying stock falls below a reasonable percentage allocation in my portfolio I will wait for a price I believe is fair and purchase more to bring the weighting up.


Anonymous said...

Had the same thought for dividends, but decided to do the drip route.
Some companies offer discount prices for reinvesting dividends, 3% to 5%, and every little bit helps the bottom

MG (moneygardener) said...

I see your point. The way I go about it, is that I will drip a company that does not experience wide price fluctations, is a long term hold, and I have a large holding in. For example RY, JNJ.

Also in SPPs, generally if you can buy more shares for free, this negates any market timing issues. I do this with MFC and Telus. With IGM and GE and I am going to buy more shares when the shares are cheap, as I am not entering into DRIPs. So I guess I deploy a range of strategies depending on the security. I do see both sides of the debate though....

Investor said...

It really should be dependent on your case for each holding size, % of the stock in your portfolio. For example if you only have around 4 - 5 % of your total worth invested in one stock then going into DRIP is not a bad idea, since you can get the discount if company offers it, and also you are saving on commission too. But if you have lot more % in a particular stock then for sure it makes sense to not go for DRIP.


S. B. said...

Actually I tend to agree. When you originally bought the stock, presumably you felt that at that price, it was the very best stock to add to your portfolio at that time. (Otherwise, why buy it?)

It would seem very unlikely that on the dividend pay date each quarter, you would feel the same way indefinitely.

I think the bottom line is that over time the dividends should be re-invested in something, so that you get the effect of compounding. But the dividend reinvestment doesn't have to be in the same stock it came from.

Anonymous said...

Very true if you want to keep a strict percentage weighting.

Anonymous said...

All good comments. There is not a right or wrong answer -- all depends on the investment strategy and goals of the individuals.

Thanks for your comments.


A very good question.