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Wednesday, January 24, 2018

DRIP vs Non-DRIP

This is a topic that is talked about frequently and there is a great divide on which one to use. I wanted to briefly describe my strategy and which one works for me. 

For starters, DRIP stands for Dividend Reinvestment Plan and allows shareholders to automatically reinvest their cash dividends in additional shares of the same company. Now, unless the stocks are held in a tax advantaged account, you will still be subject to tax on the dividends regardless of if they are automatically reinvested or not. 

So which one did I choose and why?

I've chosen to not automatically reinvest my dividends in any of my stocks. Everyone has their own strategy and I believe this works best for me.  Its possible that this strategy may change with time, but for now I'm not automatically reinvesting dividends.

Here are some of the reasons I chose this path:

1. I wanted to be able to reinvest the dividends in different companies.
When I was first starting out I wanted to diversify and invest in as many different companies as I could. This is still true today as there are a plethora of good companies out there that I haven't had the chance to invest in. I've made over $5,500 in dividends so far and that money has gone into buying 5-6 additional companies. 

2. I like to try and find value in the market
This is one of the hardest things to do when investing. However, you can almost always find good stocks that aren't performing well. It has been harder lately since the market has been doing so well, but they are out there if you look hard enough. I don't want to automatically invest in a company that is way overvalued or a company that is going broke. This strategy allows me to avoid both scenarios.

DRIPs allow you to dollar cost average and you will get shares at the highs and lows. Dollar cost averaging can be a great tool for your investments. If you are able to catch additional shares of a beaten down stock and then the stock starts to rise, you will have done very well for yourself. However, you could also be buying additional shares of a beaten down stock that may never go back up. 

When I was trying to figure out my strategy I asked myself one question. Would I rather buy 100 shares of Company A and never buy another share only to see it rise 1000%? Or would I rather buy 100 shares of Company B and then reinvest my shares buying additional shares and see the company go out of business?

For me I chose the first option because you can't really be mad at yourself if you didn't buy additional shares and the company is doing well. I would have been more mad if I bought additional shares of a company that went bankrupt.

3. Honestly, it is a lot easier to manage
Now if I had thought that DRIPs were way better for my strategy then this wouldn't be an issue. However, I don't want to manage partial shares of a company. It would be much harder to manage going forward. I will have to constantly update my spreadsheets on how many shares I have. It will also be a pain if I ever need to sell a stock (although I'm of a buy and hold mentality)

4. The difference in compounding for me is minimal
I invest in increments of around $800-1200 at a time. I do this to minimize the amount of trading fees and also to get myself invested as often as I can. Any less than this and I will run into a lot of trading fees. This also limits my exposure to any one stock at a time. If I buy $1000 of company A today and tomorrow they announce they are going bankrupt then I won't feel too bad since it is such a small percentage of my overall portfolio. 

If I buy $1000 worth of a stock that costs $100 a share and yields 3% and I choose to automatically reinvest the dividends, then it will take about 3-4 years to buy one additional share of that company. This would assume a small increase in share price and small increase in yield. For me, that isn't enough to really change things dramatically. Every time I invest now I've been making myself buy one additional share than I intended and these extra dividends that are readily available have been useful in being able to do that. 


There are pros and cons to both sides, but I think investing the cash dividends at my own discretion is the best strategy for me. 


Let me know what you guys think! What strategy have you chosen and why?

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