Selective Dividend Reinvestment Vs. DRIP

wateringmoneyRecently, I was contacted by a reader named Talgat. He emailed me all the way from Kazakhstan. It’s truly wonderful to have readers from halfway across the world!

Talgat had a question about dividend reinvestment. I wrote about this a while ago, but I thought I’d refresh this subject.

His question is verbatim as follows:

Dear Dividend Mantra,

I am writing to you from Kazakhstan and am a huge fan of your blog.

I hav (sic) also started my journey because of you.

However, I have a question for you. What do you do with the dividend income that you receive? Do you spend it on daily expenses or invest back to buy more shares? What do you advise me to do?

thanks.

Great question, Talgat.

Selective Dividend Reinvestment

What I do is I selectively reinvest my dividends. That means I collect my dividends in cash and I reinvest them selectively into equities that I choose. I certainly don’t withdraw them out of my brokerage account for expenses, as that would slow the process to financial independence. Any dollar I’m not investing is one less snowflake I’m adding to my compounding snowball. Furthermore, if I need a little extra cash all of the sudden then I would simply deposit less cash into my brokerage account and use it where it’s needed.

It’s important to remember that cash dividends are just another income source for you. They’re seen as an income source by the IRS, and I simply view them as one tool in my arsenal with which to purchase equities. Obviously, one of the main differences between my day job income and my dividend income is that I have to work for the former, while the latter is completely passive. Dividends require no work on my part, which is why I’m trying to build this source of income as soon as possible. The day my dividend income exceeds expenses means I’m financially independent and can do whatever I want with my time.

How I Do It

So my strategy basically boils down to thus: I try to save as much money as I can from all of my active income sources (day job, blog income) by living as frugally as reasonably possible. I then pool these savings with dividend income and use the combined sources of capital for my regular equity purchases.

I gross north of $50k/year at my day job, where I work as a service advisor at a luxury car dealership. I also receive some income for writing online, with this blog being my main creative outlet. I try to save as much of the income from these two sources of capital as possible, and then deposit those savings into my brokerage account once per month. This gets combined with whatever dividends have already accumulated since the last equity purchase.

Meanwhile, my dividends automatically accumulate as cash throughout the month. I don’t ever withdraw these dividends, but instead use them to supercharge my saved capital and invest all possible firepower. In the end, I think of reinvestment as just a fancy word. I’m simply investing capital, and I’m capital agnostic. Capital that comes from my day job, online income, or dividend income is all the same to me while I’m accumulating assets. However, for purposes of keeping things simple I think selective reinvestment best sums up my strategy.

Benefits Of Selective Dividend Reinvestment

I selectively reinvest my dividends for a number of reasons.

  • I’m able to avoid reinvesting into overvalued securities. By selecting where my reinvested dividends go, I can choose equities that are attractively valued at time of reinvestment, while also keeping a keen eye on portfolio weight and current yield. For instance, right now I think Emerson Electric Co. (EMR) is a bit pricey here. It trades at a P/E ratio of 22.32, and that’s after a 10% drop YTD. Six weeks ago, EMR was $70/share. I thought that was quite expensive. So my Emerson Electric dividend that got paid on March 10 got reinvested into General Electric Company (GE) on that same day because I thought it was a more attractively priced industrial company at the time. Basically, by selectively reinvesting dividends I’m able to allocate my capital as I see fit by having complete control over where my capital goes.
  • Taxes are kept simple. Automatically reinvesting dividends through a dividend reinvestment program, or DRIP, can cause nightmares at tax time if you have any stock sales because every time you reinvest a dividend automatically back into the security that paid it out your cost basis in the originating security is changed. If you DRIP for many years you’ll have to keep track of numerous lots of very small stock purchases. I face no such issues, so my cost basis in almost all of my investments is very easy to track.
  • My reinvestments are unlimited. By that I mean I don’t have to worry about what companies offer a direct DRIP, or which brokerages offer a synthetic version of DRIPing where they will reinvest your dividends automatically for you. I can invest my combined savings and dividends into whatever companies I feel fit at whatever time works for me. I don’t have to abide by any rules or worry about whether the company will continue to offer a DRIP for the indefinite future.
  • My fees aren’t increased. I don’t pay more commission costs because I selectively reinvest my dividends. I’m going to invest my monthly savings with or without my dividends, so I’m going to see commission fees through my brokerage for my monthly purchases whether or not I selectively reinvest my dividends. Adding my dividends to my savings simply allows my purchases to be bigger, and therefore my commission costs as a percentage of my capital invested is actually smaller. So, technically speaking, selectively reinvesting is actually lowering my investment costs over time.

Dividend Reinvestment Program (DRIP)

While I selectively reinvest my dividends as I see fit, this isn’t for everyone. For many people, a DRIP makes a lot of sense. DRIPing means you buy an initial lot of shares with a company and set it up to automatically reinvest your dividends back into the company instead of receiving cash. Basically, you’re receiving shares instead of cash at this point. This can slowly build wealth for you over a long period of time without you having to worry about the stock market at all. Your investment is set completely on autopilot.

Buy Stock Direct

A very easy and popular way to do this is with Computershare. This company offers direct stock purchase from a number of companies. Check out the list. There are many companies where you can invest with very little money. ConocoPhillips (COP) stock, for example, can be purchased direct through Computershare for as little as $25.00 as on ongoing investment. However, this method is not fee-free. You can view the plan details with COP and see there are fees like $0.12 per share as a processing fee.

Benefits of a DRIP

While I have never personally wanted to set up a DRIP for any of my investments, there are some advantages.

  • By reinvesting automatically you’re dollar cost averaging (DCA) into your equity investments. You’re not worried about the price of stocks with this method, because you’re using the power of the dividend payouts from the issuing companies to build your investments for you. Whether the market is high or low your dividends will get automatically reinvested.
  • It takes the fear out of investing. You don’t need to worry about pulling the trigger on anything. You can simply buy shares in a company just one time in your life and allow the dividends to reinvest and compound that investment for potentially the rest of your life. No need to incessantly worry about whether it’s a good time to buy stocks. It basically automates your investment.
  • No special knowledge necessary. You don’t need to have any investment education at all to buy stock directly with PepsiCo, Inc. (PEP) and set up your dividends to automatically reinvest. It’s a no-brainer investment and super easy. While this investment style may not lead to optimal returns over long periods of time because you may be reinvesting in periods of overvaluation, the benefit is the ease.
  • Low costs. While not always free, as I mentioned above, setting up a DRIP can be a low-cost way to invest. For example, Scottrade offers what they call “FRIP”: Flexible Reinvestment Program. This program allows you to reinvest dividends back into any company, not just the issuing security. And it’s all commission-free. So you could reinvest your The Coca-Cola Company (KO) dividend into Philip Morris International Inc. (PM) because you may think the latter offers a better value, and you could do so without having to pay Scottrade’s usual $7 commission. So with this strategy you could pay $7 one time to buy shares in a company and flexibly reinvest your dividends for the rest of your life without having to pay any more fees.

If I didn’t invest so regularly I might investigate a DRIP, or even the FRIP for that matter. However, as long as I’m able to save thousands of dollars per month and invest on a monthly basis I’ll continue to add my dividends to my savings to maximize my capital firepower. While Warren Buffett hunts with an elephant gun I hunt with a pellet gun. And my selectively reinvested dividends add a couple more pellets to my ammo.

Full Disclosure: Long EMR, GE, COP, PEP, KO, PM

How about you? Do you selectively reinvest dividends, or reinvest in a different manner? 

Thanks for reading.

Photo Credit: digitalart/FreeDigitalPhotos.net

Comments

  1. says

    DM,
    Ahh, the age old DGI question! I do both DRIP and selective. My first share of stock (CVX) was given to me in a DRIP program, so that was all I knew for a long time. It was an easier option back in 1995 because online brokers hadn’t really developed yet. So you had to actually call a person broker to buy stock, and that manual process upped the fees and was difficult with small amounts. Direct investment and dripping was a good way to start small, and I needed to since I didn’t have much to invest. Nowadays, there are many more options with the online brokers, the Computershares, and even this new stuff like Loyal3 and Motif. (Loyal3 seems like a great low fee way to get started investing). I’m upping my selective investing because it is a faster way to put money to work, and I am selectively reinvesting that pool of dividends. I may start pooling some of my DRIP income and put it elsewhere, or eventually move shares into a regular brokerage. Taxes are only a pain if you sell the DRIPs. But now that cost basis is tracked, it has gotten easier for positions started after 2011. But not as easy as one brokerage account.

    Great to see the international participation!
    -RBD

    • says

      I reinvest dividends selectively. That way I tend to put my dividend dollars to work in the best values I can find at the moment. As a result, I am further increasing the compounding effect of my dollars.

      For anyone that is putting money to work every month, they can merely add dividends received to the mix, and buy the best value out there. Otherwise, reinvesting money in a company that you wouldn’t buy because it is overvalued is a disservice to your capital.

      Dividend Growth Investor

      • says

        DGI,

        Couldn’t agree more.

        Valuation is essentially at the heart of this for me. If I’m not comfortable investing capital from my day job into a stock due to excessive valuation, then why would I feel any better about reinvesting dividends into the same stock?

        Thanks for stopping by!

        Take care.

    • says

      RBD,

      I’m also glad to see the international participation. It’s really encouraging.

      Man, owning stock since 1995. You’re old school my friend. That’s really awesome. I hope to one day be in the same position where I can count decades of ownership, instead of just years.

      Best wishes!

      • says

        Dripping works well the longer you do it, and its a good way for beginners to start with $50-$100 a month. I’ve always reinvested in KO and CVX since the 90’s. At times I was reinvesting at 52 week highs. And yes it doesn’t always feel right. But when they keep going up, you either buy at the highs or don’t buy any more.

        Individual stocks can be very hard to time right, so dripping is a good option I think for the awesome dividend companies (KO, CVX, MMM, JNJ, PG) if you don’t have a lot of capital and want to slowly build a position with small purchases. It can be less risky then buying in big lots. All said, the larger my holdings become, and the more diversified I become, the more I want to stop reinvestment in my biggest holdings. They have gotten to be disproportionate.
        -RBD

        • Ravi says

          I had this problem with AT&T as we’ll. I bought in the high 20s a few years back and have reinvested since (anywhere in price from 30-38). It’s my single biggest holding so I sold off $1,500 and put into a Europe etf. I didn’t have enough exposure in that sector and don’t know much about it so it seemed like an easy decision.

          AT&T is still my biggest single position, but I’m okay with that as long as it’s not grossly enormous. I think over time it will all work itself out.

          Sell Hugh buy low right?

        • Dr. Hyun says

          Retire Before Dad,
          I think you’re on the money about DRIPing… why would you not re-compound your payouts in the companies you named? Not too many places they’d be better served.
          I think trying to be so selective w/ where you re-deploy your dividends creates its own set of problems (e.g. over-diversification, bottom-feeding for “value” etc). Selective reinvestment can work well in the right conditions and w/ the right amount of diligence but I don’t think it is for everyone. To me, its a classic example of a false dilemma… it should not be one or the other but both that the successful investor uses.

  2. says

    I do a bit of both but im seriously considering stopping the automatic reinvestment and going completely selective. It allows for more freedom and better reinvestment opportunities due to valuation. Although it sure is nice to see some positions increase by a share or two every quarter through no action of my own. Its a difficult decision but the important thing is that you’re reinvesting them now while you dont need them for expenses.

    • says

      JC,

      I agree: The most important thing is that you’re reinvesting the dividends. One could debate the benefits and drawbacks of each strategy, but reinvesting at all is ultimately the point of it.

      I think selective reinvestment is superior in most cases, but I can see the benefits of a DRIP, especially for those with little capital.

      Best regards.

      • itsme says

        I was reading through the comments on this post again this morning. Got curious about if you have ever seen a study comparing selective reinvestment versus DRIP. That would be some interesting reading.

        • says

          itsme,

          I’ve read some comparisons over at Seeking Alpha over the years, but it’s hard to compare the two realistically because it’s all backtesting, which is easy to bias or sway in a certain direction. Furthermore, it’s impossible to pin down real-life reinvestment points as we all invest at different days depending on when our income comes in, what opportunities are there, etc.

          For an accurate real-life comparison I would have had to go back in time from the beginning and run a mock portfolio concurrently to my real portfolio that was set up on a number of DRIPs. It might be interesting to see which one would be ahead right now, but also a ton of work. I don’t know if we’d be looking at massively different end results because my portfolio is still relatively small. Perhaps once it’s twice or three times its current size you might see a large difference between the two strategies.

          Best regards!

  3. says

    Currently I DRIP, but anticipate that stopping later this year as my capital should be freed up for some regular monthly investing. Until that happens, it doesn’t make sense to let them pile up as I’m not quite at the level where they could be reinvested selectively in a cost effective and timely manner. I definitely look forward to transitioning.

    And just to second what RBD said, the cost basis tracking is no longer an issue for any positions initiated after 2011. As a result, this really isn’t a negative against automatic reinvestment any more.

    • says

      W2R,

      I think you’re making a smart move there. A DRIP is an intelligent strategy if you lack the capital to combine with dividends for regular selective reinvestment. However, I’m excited for you when you can end the DRIPs and reinvest at your own discretion; that will mean you’ve got some serious capital to work with. :)

      As far as tracking cost basis, while Scottrade tracks my cost basis I’d still feel comfortable also knowing where I’m at for myself. The last thing I’d want is a “disagreement” with the IRS and only having Scottrade to blame. I think one can only benefit by streamlining things when and where possible.

      And thanks for the twitter love, by the way. Same for RBD!

      Best wishes.

      • says

        W2R,

        I track my cost basis religiously. I always err on the side of caution. If I am wrong – it is still a win-win for me. If I am right – I will be able to post my cost basis when needed.

        Sure the broker tracks your cost basis, but I could see a lot of things happening that could result in noone tracking your cost basis. Remember, just because something is supposed to be a certain way, doesn’t mean it would work a certain way. Always ask yourself if anything could go wrong, and how that could affect you.

        • says

          Oh, don’t get me wrong, I also religiously track my cost basis, including the reinvested dividends. Diligent record keeping is the responsibility of any and all investors, regardless of the investments style or size of the investment. That being said, I no longer consider that to be a true negative when evaluating whether to selectively reinvest dividends or not.

  4. says

    I reinvest most dividends when paid. I use the leftover cash to buy new companies when the price is the right for me.

    Nothing to buy much now…few deals to be had.

    DRIPs help take the emotion out of investing.

    For me, it makes investing easier.

    Good post.

    Mark

    • says

      Mark,

      Good point there. Using DRIPs can definitely take the emotions out of investing. However, I’d say that comes at the expense of possibly buying overvalued securities. If one has the fortitude to invest in individual common stock then one should also have the fortitude to leave emotions out of it. But I guess we know that isn’t always the case, right?

      And I agree with you in regards to deals. While I still see some decent buys here and there, there aren’t any steals. I look forward to it as a challenge, however. :)

      Cheers!

  5. says

    DM,

    I am in the camp that does some of both. High yield stocks make great drippers. What you lose in dividend growth you can more than make up for with increased shares. If you DRIP a low dividend growth stock like T, 100 shares at 5.6% today can easily become 160-170 shares in 10 years with a 25-40% higher dividend. You could essentially double your retirement income in 10 years with a “utility”. Imagine dripping 100 shares of MO starting 20 years ago! Now that’s what I would call a snowball.

    • josh says

      What would 100 shares of MO look like today? Sounds like a great article to me. I can only imagine the amount of wealth and the size of that snowball plowing down the hill.

      • says

        josh,

        I believe Jeremy Siegel did the backtesting and found the old Philip Morris stock as the best performing stock over the last 50 years – at least when he did his research.

        While I appreciate looking at stocks like this and drooling over the historical returns, I prefer to see forward progress made every single day. We can’t invest in the past, but an investor’s lifetime success is made up of small, successful steps made every single day. To me, that’s where the magic is.

        However, maybe I’ll take a look at something like this some time soon. It would nonetheless be interesting for sure.

        Take care!

    • says

      My Dividend Pipeline,

      I hear you!

      I look at some of the higher yielding stocks in my portfolio as a little rocket juice to propel the rest of my portfolio into the stratosphere. Then by that time I hope the lower yielding stocks have grown their payouts enough so that the income can propel me into outer space. That’s the plan anyway.

      And I agree with you on the importance of reinvesting these larger dividends. The reinvestment somewhat makes up for the lower growth over a long period of time because you’re growing a larger base, and therefore buying more shares. That can make a big difference over time, and is especially highlighted with how well the old Philip Morris did for investors. Combine a high yield, low valuation, and at least decent dividend growth and you have a big winner there!

      Cheers.

    • says

      Huge! I think even KO buyers in the early 2000s did alright due to huge payout growth over 10 years. I hope this happens with my AT&T holding after a decade. A nice water spigot that instead pours cash which I can then reinvest in AT&T or somewhere else. Personally, I think it will do well over the next 30 years overall as we become more reliant on mobile data for applications beyond just Facebook/YouTube.

      • says

        Ravi,

        I hope you’re right about AT&T as I have a position in the company, among other wireless providers. I’m mixed on them due to high wireless subscriber penetration, high CapEx, and strong competition. But, as you mention, there’s a lot to like too.

        Best wishes.

  6. says

    I am all in for the DRIP’s. I’m not upset even though it may buy less shares when the price is high.

    Some of the high quality stocks deserve to be that high. I am not too upset that it will buy me less shares when the price is high. Some of the higher quality stocks I own deserve the valuations.

    Monthly dividends especially compound quicker and more often if only work income did that for me I’d be able to buy more shares at a time.

    If they get out of hand then maybe some of the companies managements will decide to split the stock like General Mills, Deere, and CocaCola have done in the last 5-6 years. The stock splits along with the dividend, but the price of these iconomic companies don’t hide for long and dividend as the price per share will pick up again along with dividend hikes. Companies prove the value over decades.

    If I can find a higher salary one day I may switch and really do like the flexibility of selectively reinvesting dividends. If the pool of dividends becomes large enough I may do this. Or possibly start a seperate brokerage account to take the cash. Right now I’m on autopilot and one day in the future be able to take off DRIP and live off those checks. Sooner better then later!

    • says

      Sorry for the double posted some of the same stuff and errors. It was deleting each letter ahead as I was typing my thoughts.

      Anyways a few of my stocks I have in DRIP to some may be well overvalued such as MMM, KMB, and BA. I don’t mind though because I think my money is safe with them. On;y problem is my cost basis was half the prices they are now and the taxes as you mention if sell. The newer rules will help with brokerages having to track cost basis though.

      • says

        SWAN,

        I agree with you. I think using a DRIP makes the most sense for those that lack the capital necessary for regular, monthly investments. That way you’re compounding your dividends via reinvestment right away instead of waiting for such a time enough capital is available to make sense of a purchase.

        The newer rules definitely help cut down on the cost basis headaches, but I still like to be able to reference the numbers myself. I think it’s important to always know where you stand if need be.

        Keep up the great work. Sounds like you’ve got a solid game plan over there. :)

        Best regards.

        • Ravi says

          I like vanguard brokerage for this reason. It limits you to 25 traded a year for $7, unless you exceed $50k in their funds.

          At this point I’m still under that balance in their funds, but their tools show all purchases and gains/losses by purchase when you click for details. Sure does make cost basis information easier to get, and also let’s me see more easily how much of my total return is capital gains and how much is dividends.

          I don’t see myself making more than 25 trades a year for a while. I think it jumps to$20 or something crazy after that. Once you hit $50k in assets it’s $7 unlimited. I hunk I’ll hit that balance if I ever need to start trading a lot more.

  7. says

    This is a great article, thanks for expanding on the subject.

    I am partial toward selective dividend reinvestment. Since I get free trades with Wells Fargo, I have even less incentive to DRIP.

    When I get ready to make a purchase, I just grab whatever dividend money is in my account and put that toward the new purchase. As you point out, the tax situation is kept simple, which is a major plus come tax time. Wells Fargo just sends me a packet with all relevant tax info, so it’s easy incorporate my dividend income into my taxes.

    • says

      Spoonman,

      Nice. Sounds like you and I are on the same page. You are in an even better situation than I am with the free trades through WF. That’s fantastic.

      My taxes are really easy with Scottrade as I just directly import everything into TurboTax. That makes quick work of my 1099 forms.

      Keep up the great work. Can’t wait to read about your FI adventures. :)

      Cheers.

      • says

        That’s cool that Scottrade info is imported directly into TurboTax. So does Scottrade generate some sort of file that you download and then feed into TurboTax, or does TurboTax talk directly with Scottrade over the web? Either way, that sounds cool.

        • says

          Spoonman,

          When I’m doing my taxes I simply select Scottrade from a list of brokerages and enter my account info. From there it simply pulls everything over and imports my 1099 info right into TurboTax’s software. It’s quite easy. I simply double check everything.

          It’s pretty neat!

          Cheers.

  8. says

    Great article as always Jason. Like some of the others that shared, I use a combination of the two methods. I currently reinvest dividends automatically through my brokerage’s DRIP in my IRA as with the limited contribution limits, I plan on only making 2-3 trades per year. Dripping helps keep the account growing the rest of the year and not let too much cash just sit idle. In my taxable account I use the same method as you, combing fresh capital with whatever dividends accumulated over the last month to make a new purchase.

    • says

      Mr. SFZ,

      Sounds like a very reasonable strategy there. I see a lot of people employ a hybrid strategy, with a mix of the two. And that can certainly work well. I think a DRIP makes particular sense with an account that sees irregular or smaller capital contributions. Like you said, with that strategy you’re then putting the dividends back to work right away, instead of waiting for the day when fresh capital is available.

      Cheers!

  9. says

    DRIPing is great way to compound since we don’t know which stocks will take off. It’s a shame I didn’t DRIP companies like RTN, ITW, JNJ, or SBSI for example. We can automatically import tax data with Turbo Tax anyways… I’m sure investors around the world have similar software.

    That said I practice selective reinvestment with 95% of my holdings for the reasons you mentioned today. The 5% I do DRIP offer dividend reinvestment discounts. My goal is own more shares, I cannot talk myself into passing up a perfectly good discount!

    • says

      CI,

      I feel the same as you: I also have a hard time passing up a discount! :)

      I could regret not using a DRIP for ITW, JNJ, or others…but, in the end I wouldn’t have had positions with other companies that may have done very well too. It’s not about picking the home runs, but hitting singles and doubles consistently. I used EMR vs. GE because I think it’ll be fun to see which one does better over the next five years in terms of dividend growth. My money is on GE, but maybe I should have bought more EMR. Hopefully, I’ll remember to check back in five years.

      Best wishes.

    • Ravi says

      My biggest regret is not putting some of my higher payout holdings into an IRA! It wouldn’t be much, only 5-5.5 per year in the last few years, but ordinary income taxes are killer of dividends! One day I’ll have figured it all out. I suppose just making regular investments and saving until it hurts are ultimately more important than squeezing every tax peculiarity to the max.

      • says

        Ravi,

        I think most people would be wise to use tax-advantaged accounts. However, for me even higher-yielding stocks will continue to be held in a taxable account due to my rather short time horizon.

        And I would agree that living frugally and investing intelligently is much more important than trying to maximize tax efficiency. I’m not saying that avoiding paying more taxes than one needs to isn’t important, but rather that it shouldn’t be one’s primary focus. Tax-advantaged accounts have been around for a while now and yet we still get bombarded with stories about an impending retiree crisis because nobody has enough money.

        Cheers!

  10. says

    DividendMantra,

    Thanks for your detailed article on my question. It seems that my question is a relatively basic one, but as I have just began actively investing my funds, these sorts of questions are very important for me. Hope for your understanding.

    I cam acrosss this blog just couple of months ago and have been absorbing as much information as possible. And just couple of weeks ago have started putting my capital to use, and am a huge fan of DGI now. Anywhere I go, I try to spread the wisdom of DGI.

    Thanks to all the participants of comments sections.

    Talgat

    • says

      Talgat,

      Hey, thanks for stopping by. I hope the article answered your question.

      And congrats on starting your own DGI journey. I hope it serves you as well as it’s served me! :)

      Cheers.

  11. Seviay says

    DM, I didn’t scroll through all of the comments, but I wanted to let you know that if you sell stock that you have had over a year, whether or not it is from reinvestment of dividends or your initial purchase, when you file your taxes, you can select an option that essentially states your holding period was “longer than 1 year (purchased at different times)” so that you do not have to track your cost basis.
    I just wanted you and your readers to know this because it takes a lot of the stress off of dividend reinvestment over long periods of time.
    Cheers

    • says

      Seviay,

      I’m not familiar with what exactly you’re referring to? There’s only so many ways to track a cost basis, but none of them allow you to simply not track a basis at all. I assume you’re referring to an average cost basis, but that, I thought, is only available for mutual fund investments. In that case, you’re using an average rather than a FIFO or LIFO.

      Could you expand on this a bit more? The IRS will always require a cost basis to be reported so that the taxes owed can be determined.

      Take care!

  12. Shane says

    Jason, do you take advantage of the Roth IRA? If you were interested in a drip or frip it makes your cost basis and taxes a moot point and you can always withdraw whatever you put in at any age. Just think dividends for life and no taxes, I get wood just thinking about it.

  13. says

    I’m in your camp, Jason. I selectively reinvest my dividends in companies on my watch list that are currently undervalued. I generally have 40+ companies on my “buy” watch list, but I admit only a small hand full are undervalued.

    I think the hardest part is waiting for my next paycheck, so I can transfer funds into my IRA to add to the dividend income. I won’t pull the trigger until I have at least $1000 to invest to help keep expenses down.

    • says

      luckydog17,

      I hear you! I always hate counting down the days until my next commission check hits my account so that I can go shopping. I get so anxious as I keep my shopping list current. :)

      Just part of the fun of all of this, right?

      Thanks for stopping by! I hope we get some better values soon.

      Best wishes.

    • says

      FFdividend,

      Glad you like using the FRIP. I think it’s a great program. I may employ it one day, but as long as I have capital to invest on a regular basis I’ll continue to selectively reinvest by combining my dividends with fresh cash.

      Take care!

  14. donebyforty says

    Great run down, as always, Jason. The FRIP does sound like a nice way to maintain control of where you put your dividends, but while avoiding fees. Is there a reason why someone shouldn’t use this method, rather than manually doing so?

    • says

      DB40,

      Hmm, good question.

      I think it’s a great alternative to a DRIP because it’s flexible, but for someone like me it wouldn’t really offer me much of an advantage, unless I wanted to spread my capital across many stocks in one month.

      If I’m confident enough to invest, say, $1,200 in a company in a particular month, then I should feel even better about investing, say, $1,500. If I didn’t have the regular capital necessary to make the purchases I do then I’d definitely employ the FRIP. That way I don’t have dividends just lying around collecting dust. :)

      Best regards!

  15. says

    Hi Jason,

    I have been DRIPing selectively, by turning it off for current stocks that I feel are overvalued while allowing the undervalued ones like TGT and PEP to reinvest automatically.

    However, you made a good case regarding the fact that the commissions are going to happen anyways, so why not have full control. I may be switching my strategy soon…

    • says

      Kevin,

      Yeah, I think as long as I’m going to pay the commission then I might as well have control over where my dividends go. And why not have access to even more firepower in the process? Makes sense to me. :)

      If you have enough cash to make sizable monthly purchases you may want to give this strategy a go. Let me know what you think if you do!

      Cheers.

  16. says

    Good article.

    I DRIP everything right now since I’m starting out. Maybe when my portfolio gets large enough, I can start selectively reinvesting it in undervalued companies.

    When you eventually retire, will you no longer selectively reinvest the dividends and just use the dividends to pay for everyday expenses?

    • says

      Richie,

      I don’t think it’s necessary to have a large portfolio to selectively reinvest. I selectively reinvested my dividends right from the start. However, if you lack a capital source large enough to fund monthly purchases then at that point a DRIP may make sense.

      That’s a great question regarding the dividend income.

      Once I retire I plan to use my dividend income completely for expenses. However, I’m hopeful that over time the dividend income will grow faster than inflation/expenses, and eventually down the road I can start reinvesting dividends again. At that point the passive income will be growing faster than I could ever hope to spend it, and compounding will be really working some magic. But I predict that to be many, many years down the road.

      Cheers!

  17. Justin says

    I’m DRIPing the dividends right now, because I’m not pulling in enough monthly dividends for them to have much effect. And I already have too much cash sitting on the sidelines as it is, with few good places to invest it.

    Of course, that raises the question of why I won’t add new capital to my existing holdings because of valuation, but am willing to put the dividends right back into them. And I’m not sure I have a good enough answer for that.

    Still, what a nice set of problems to have. I plan to switch dividend reinvesting to manual once they’re big enough to buy a new position all by themselves every 3-4 months.

    • says

      Justin,

      Like I mentioned to Richie above, I think it’s less about the dividend income itself and more about the capital that is available to combine with dividends. I’ve been selectively reinvesting right from the start – even when I was only getting $5 or $10 per month.

      And you bring up a good point there regarding valuation. I don’t separate dividends from any other capital source. Like I wrote in the article, I’m capital agnostic. So why someone would treat dividends differently from cash money they get from any other source is beyond me.

      Either way, I wish you the best of luck. And like you said, it’s a great problem to have! :)

      Take care.

  18. Kathy says

    We also selectively reinvest our dividends because we have a limit on how much money we want invested in any given stock. There are quite a few stocks out there that pay a nifty dividend so they aren’t really hard to find. Our bigger problem is maintaining a stock to bond ratio that we decided we want to have.

    • says

      Kathy,

      I hear you. I operate similarly in that I don’t want too much invested in any one particular company. Furthermore, some of my positions are disproportionate – I’m looking at you PM and JNJ!

      Selective reinvestment gives me the opportunity to allocate my capital to my best ideas at any given time. And I think that strategy gives me a good chance at reaching my goals.

      Thanks for stopping by!

      Best wishes.

  19. says

    Jason,
    My sharebuilder acct is on auto drip. I dont get charge whenever I drip. My question is, wouldnt it be smarter if we drip so we dont get taxed right now since we dont receive any money yet. And by the time we retire, we are going to be on a lower income tax bracket paying little to no tax while collecting dividends. Whats your take?
    Thanks,
    Christian

    • says

      Christian,

      I’m not quite sure I understand your question.

      Whether or not you use a DRIP to reinvest your dividends has no effect on your taxes. If you’re issued a dividend in a taxable account that dividend is subject to taxes, whether or not you automatically reinvest it back into the originating security.

      However, if you’re issued dividends in a tax-advantaged account like an IRA then it’s a different story. But using a DRIP or selectively reinvesting dividends still has no effect on your taxation. You still received cash in both circumstances, but in the former you simply reinvested it back into the originating security immediately.

      I hope that helps!

      Best regards.

  20. says

    Hi Dividend Mantra,

    I am Passive Income Mavericks and have a DRIP portfolio where dividends are re-invested on auto. This takes out the human emotions out from the picture, considering that portfolio is for long-term duration. Besides this portfolio, I also have 2 other High Dividend Income portfolios (HID1 and HID2) where dividends are re-invested in securities that have good valuation and also help in diversification of my portfolio.

    I started dividend investing in year 2011 with a small amount of $50, around the same time when you started your blog, and it has grown to over $25,000, which is fantastic to me.

    Keep up the good work!

    Best wishes!

    Passive Income Mavericks

    • says

      Passive Income Mavericks,

      Thanks for stopping by!

      I just stopped by your blog. It’s interesting that we’re both on a twelve-year journey to financial independence. I wish you the best of luck. It can be tough at times, but the reward, I’m sure, is worth the hard work.

      Congratulations on your success so far. That’s some very solid progress, and it looks like you’re also funding a tax-advantaged account too.

      Keep up the great work.

      Take care.

      • says

        Jason,

        Thanks a lot for your kind words and encouragement. It means a lot to me.

        I just wrote an article on my blog about FI and mentioned about Dividend Mantra’s take on it as about “Choice”. You have put it so beautifully!

        Appreciate if you could add my blog to your blogroll.

        Best wishes!

  21. says

    Great write up Mantra, at first I was going to ask you about fees but it definitely makes sense waiting until the end of the month and investing your dividend payments with your excess cash from your day job and blog.

    • says

      Marvin,

      Thanks! Glad you enjoyed the post. :)

      Yeah, my fees are no different with selectively reinvesting. I’m going to invest fresh capital and pay commission anyhow, so may as well increase the size of my investments by combining recently received dividends.

      Thanks for stopping by!

      Best wishes.

  22. says

    DM,

    I am a bit confused how selective doesn’t increase fees? Are you saying that since you are going to buy $1,000 worth of ABC in April, if you didn’t reinvest you’d be investing $1,000 + $X (dividend you didn’t reinvest)? Does it actually work out that easy? I am probably not as disciplined as you, but I see myself saying, “Oh I don’t have to send over $1,000 I already have $200 in cash sitting there.”

    Like most people who have commented I have thought about this issue before and figured I would revisit it when the dividends were large enough to matter. Right now I am below four digits annually so I want it idiot proof and let it compound.

    • says

      Evan,

      Sorry for any confusion.

      You pretty much have it correct there. So if you’re able to save $1,000 per month, and your dividends are now up to, say, $75 per month, then you would simply invest $1,075 in your next position, rather than just $1,000. My purchases are simply larger now than they would have otherwise been because of the dividend income. Dividends, in the end, are just capital. I combine them with whatever other capital I’m able to scrounge up and then purchase stocks from there.

      I hope that clears it up a bit.

      As far as still just having a small amount of dividend income goes, I think selectively reinvesting is still wise as long as your capital contributions are regular and large enough so that the dividends aren’t sitting around. I was selectively reinvesting even when my monthly dividends were under $20/month.

      Cheers!

  23. says

    Great article, Jason. I think you’ve got a super sound strategy here and clearly it’s working :) I especially like reading comments in articles like these to hear how everyone else’s strategy is working. Thanks for starting the discussion!

    • says

      Ryan,

      Glad you enjoyed some of the comments. I personally find the comment section much more informative than the articles. I’m just blabbering sometimes, whereas you’ve got the combined knowledge of an entire community here in the comments. That’s some good stuff!

      Thanks for stopping by.

      Best wishes.

  24. says

    Curious to know what your thoughts are on using small amounts of margin?

    I for example often buy a bit on margin then wait for the dividends I get to pay that off before buying a bit more on margin again.

  25. says

    I like ShareBuilder because it lets me DRIP into partial shares so I never have to worry about money that isn’t being put to work, and it is a good way to cost average as you mentioned. Also, ShareBuilder lets you do $4 automatic investments every Tuesday in which you can initiate new positions in partial shares which is also nice.

  26. itsme says

    Just heard about your blog today. I really like it! You do a great job.

    My wife and I started investing in 1995 and followed our advisors advice like a bunch of sheep. After a huge loss during the .com drop, we got introduced to dividend investing by an advisor in 2003. The more I thought about it, the more it made sense to me. I like income! We have our dividends automatically re-invested because it is simple and free through our broker. Automatic reinvestment takes a little work off of me when managing our portfolio. Could we make more…..sure; however, our current style makes for minimal stress. We do have some municipal bond interest that I use to buy more shares in the holdings we have.

    For everyone out there, stay focused and don’t listen to the talking heads. I am hoping a downturn will occur and help grow our dividends more. Half the price buys twice the shares which pay twice the dividends. Our portfolio dividends are growing about 5% per year and we get about $85K/yr at this point. That provides for a lot of freedom if something happens in our lives.

    • says

      itsme,

      Thanks for stopping by! Glad you found the blog. :)

      And congrats to you and your wife for achieving such success. $85k in dividend income is just about unfathomable to me at this point in my life, but I also know that it’s possible. I see the potential every single day. The vision is definitely there.

      I certainly hope you continue to stop by and drop some knowledge on us from time to time. You have obviously done incredibly well, and I can only say congratulations! Keep up the fantastic work.

      By the way, would you care to share any of your biggest holdings? Or do you diversify across your holdings fairly evenly?

      Thanks again for stopping by.

      Best regards.

      • itsme says

        Thanks for your kind words! I don’t mind sharing holdings at all.

        We have a base in our 401Ks in S&P index funds (about 15% of our portfolio) since they don’t allow us to buy individual stocks. We have a large holding in SDY of about 7% of our portfolio. Even though it has an operating expense, it has done us well and allows us to own a little of all of the stocks in the dividend aristocrat index. We bought this before aggressively investing in individual stocks. About 7% of our portfolio is in municipal bonds to provide some tax free income that we can reinvest into our stocks. Taxes are evil! :-)

        Our largest individual stock holding is JNJ. I love JNJ. If you had invested $76500 in 1980, it would be worth $6.8MM today if you reinvested your dividends. You can not beat the power of compounding and dividend reinvestment! Our other individual holdings are PG, AEP, MMM, LEG, COP, KMI, PEP, T, PG, O, BP, ORI and SNH. We have several ETFs (XLK, VWO, VOE, VBR, SCHD, DOL) that I use for a little diversification.

        We diversify (sort of) over different sectors but don’t worry too much if we vary from the “ideal” numbers. We are energy heavy and technology light but that is the nature of this style of investing. We don’t sell to keep a stock below a certain percentage in our portfolio since in my mind the value of the stock is not real important. The dividend is important and dividend growth is paramount.

        Our idea of retirement is not sitting on the porch doing nothing. We look at it as freedom. Freedom to travel if we want. Freedom to take a job that pays less but is more enjoyable. Freedom to not worry. Everyone can do it. Just takes time, discipline, and the power of compounding to get there! In this case, the turtle wins and the hare loses. Also remember it is not a competition to have the highest yield or return. Do your best, learn from your mistakes, and be confident about your plan! Talking heads on TV? Just ignore them. If they were so knowledgeable then they would be trillionaires! They aren’t so what does that say?

        Sorry for the long post. I get carried away when I “talk” about dividend investing. It’s become a hobby for me.

        • says

          itsme,

          Thanks for coming back and sharing. Really appreciate that. And don’t worry about getting carried away: You’re talking to the worst offender of them all. :)

          And those are some great holdings there. MMM is one in particular that I hope to eventually invest in.

          And I couldn’t agree more with your idea of retirement. I also think it’s all about freedom to do whatever one wants to do. Once you’re free, you can live your life on your terms. And that’s pretty fantastic.

          Keep up the great work! I hope you stay in touch.

          Best wishes.

  27. says

    Hi Jason,
    I am new on your blog and I think it is simply amazing. I like the fact you share your ideas regarding personal finance and dividend as main part of long time financial planning. I do agree with the expense reductuin of superflous things and to have a plan to invest your money wisely.
    I started to run a blow where to share the same idea, but I am at the beginning and I hope to learn more from you. If you could have a look at it and give me some suggestions I would really appreciate.
    I would like to help to share this concept to allow more people to be conscoius they can build their safety with very low effort and some proper actions.
    Thank you
    Alex
    http://pennysmyth.com/

    • says

      Alex,

      Thank you so much for the kind words. I’m glad you found the blog and enjoy some of the content. I’m here to inspire others into action, and it sounds like you’re after the same objective. So we’re on the same page. :)

      As far as your blog goes, it’s got a great design and the content seems solid. Just be yourself. The only issue I noticed is that it seems like English might be your second language, so some of the articles are a bit hard to read. Other than that, I think you’ll do fine!

      Keep it up. Keep saving, investing, and writing, and good things are bound to happen.

      Cheers!

  28. jamiepcola@gmail.com says

    DM:

    I am new and have a somewhat of a small portfolio that generates just under $1,000 a year in dividend income. My quarterly dividend payments are smaller and in most cases, not enough to repurchase even 1 share in the stock. If I participate in DRIPS, will this feature purchase fractional shares or will I have to wait until enough money is accumulated before additional stocks will be purchased?

    I ask because I just read up on “FRIPS” and it seems pretty useless to people with smaller portfolios because the feature does not purchase fractional shares. Therefore, the money will just sit there until enough money is finally accumulated to buy at least one year (which can be a very long time if you have a smaller portfolio value). Not sure if DRIPS work the same way or if DRIPS will actually repurchase fractional shares.

    If DRIPS does repurchase fractional shares, it seems this would be the answer for people with small portfolios. However someone like you, who has a larger dollar value portfolio, would definitely want to take advantage of FRIPS (if they are not selective reinvesting).

    • says

      jamiepcola,

      I selectively reinvested dividend income right from the beginning. I didn’t originally use DRIPs, then change to selective reinvestment later down the road. Worrying about $8 sitting around for a week or something is just completely missing the forest for the trees, in my view, and completely ignores the downsides of DRIPping potentially overvalued stocks. Benefits and drawbacks to both sides, but worrying about not being able to selectively reinvest because you don’t have a lot of dividend income coming in isn’t really one of those drawbacks of selective reinvestment.

      DRIPs usually do allow the purchase of fractional shares. FRIP is a product/service that is specific to one brokerage – Scottrade.

      DRIPs are nice and easy way to go about reinvestment, though. You can kind of “set it and forget it”, and allow positions to build up and compound over time. But there are drawbacks, as I pointed out.

      Cheers!

Join The Discussion!