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Dividend Investor: DRIP or selective dividend reinvestment?

Dividend Meter

If you are new to dividend investing you are probably asking yourself a question: “Should I use DRIP (Dividend Reinvestment Program) to reinvest dividends or should I reinvest selectively into different stocks?”

This question is actually quite easy to answer, but first lets take a quick look at what each strategy means:

 

 · DRIP

 

DRIP is a program you can set with your broker up and automatically reinvest all your dividends back to the stock which generated that dividend. It is free (no commissions and fees), you can be buying fractional shares of the stock, easy to set up, and it is totally on autopilot. As soon as you receive a dividend, it is automatically reinvested without your intervention.

I didn’t use DRIP in the past, but at the end of the last year (2015), I decided to set it up. Later in this post I will explain why you should do it too; when and why.

 

 · Selective dividend reinvestment

 

You can choose reinvesting dividends selectively into different stock(s) or a stock which generated the dividend. They are not automatically reinvested. When you receive a dividend you keep it in your account as long as you accumulate enough to buy new shares of any stock you choose.

Unfortunately, with the selective dividend reinvestment you will pay a commission as it will be recognized by your broker as a regular trade. For this reason you need to accumulate enough cash to make it a meaningful trade so commission won’t “eat you up”. I, myself, have a limit $1,000 per trade. Buying with less money will cost you more on commissions.

For example, if you are trading with TD Ameritrade and they charge you $9.95 per trade, buying shares for $100 would cost you almost 10%. And to make 10% loss, your stock will have to go up almost 20% to break even.

With $1,000 amount your commission loss will be a bit less than 1% and that is acceptable.

I used to use this strategy, but no longer do it. But at some point in the future I will get back to this strategy. Find out below why and when you should do this too.

 

 · Selective dividend reinvestment or DRIP?

 

The answer to this question is easy.

You should use DRIP every time your portfolio generates less than your limit per month. Once you start making your limit amount per month, you can switch to the selective reinvestment strategy to boost your dividend income.

For example, if my limit is $1,000 per trade and my dividend portfolio generates less than that per month, I will use DRIP. Why?

If you just started and generate for example $100 per month in dividends, you will be waiting a whole year to be able to do your next purchase. It means, your cash will be sitting in your account doing nothing for the entire year! Not acceptable for me.

Of course, this is a simplified view as you can take into account your monthly contributions and adjust your limit and dividends accordingly. That means, if you can afford contributing for example $200 dollars per month, then you need $800 dollars per month in dividends to switch from DRIP to selective reinvestment strategy.

For example, I invest into dividend growth stocks (DGS) primarily in my ROTH IRA account. With annual contributions limit of $5,500 dollars I can contribute $458 dollars monthly not to exceed this limit. The remaining $542 dollars must come from dividends per month in order to switch into selective dividend reinvestment. Having such cash sitting in an account for a month or two before I can invest is not acceptable to me. Those monies could work for those two months instead.

 
 





2 responses to “Dividend Investor: DRIP or selective dividend reinvestment?”

  1. DivHut says:

    Since I started down the road of becoming a dedicated dividend growth investor I have DRIP’ed every dividend received. I’m sure over time, I’ll have a combo of selective reinvestment with automatic reinvestment but for now I’m 100% auto DRIP.

    • Martin says:

      I love DRIPping so far too, but for sure, once I reach my limit I will use dividends to selectively reinvest into other stocks. But now I need to accumulate fast and use DRIPping to help me with that!

      Thanks for reading and commenting!

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