As a dividend growth investor one of the first things you must decide is whether you want to automatically reinvest your dividends or collect them until and add them to new investment capital. There's advantages and disadvantages to both. The thing I like most about automatic reinvestment is that you're able to consistently add to your position and increase the number of shares you own. Once I identify a high quality company that continues to increase their dividend year after year, I want to own as much of that company as I can. Automatic reinvestment allows me to do so easily and without thought quarter after quarter and continues to build up my position, portfolio, and most importantly my dividends.
"Price is what you pay, value is what you get" - Warren Buffet
While automatic reinvestment is great because it's exactly that, automatic. No decisions on valuation are in play. I'm reminded of Warren Buffet's quote whenever I see a dividend get reinvested at a price that I'm not even considering investing fresh capital at. Plus by collecting the dividends from all the companies you own and adding them to cash in your account it allows you to make even larger purchases whenever you do find a great company trading at a decent valuation or better yet and undervalued price.
Ever since I started investing in dividend growth stocks I've been in the automatic reinvestment camp for the majority of my positions. Usually I would just collect the dividends if they were so tiny that they wouldn't make a noticeable addition to the original position, i.e. 0.002 shares or something along those lines. There were also a few companies in my portfolio that I didn't want to increase my position size for one reason or another. Whether that was the company was struggling or the valuation just seemed way too rich. Although for the majority of my investing "career" and the majority of my portfolio, I've been automatically reinvesting dividends back into the paying company. Another big advantage to collecting the dividends in cash is that you don't have to keep up with a each and every cost basis for every position you have. While my intent when I purchase is to own that company forever, sometimes things change and mistakes were made. Since I just did my taxes earlier this month it's definitely a pain because while I trust that TurboTax will import the data from my brokerage correctly, I still had to double check each and every position. This will save a lot of hassle come tax time in the future.
When I first started I had the idea that I would turn of the automatic reinvestment whenever my dividends became a significant amount on a consistent basis. I wasn't really sure what I considered "significant" because almost anything seems significant compared to that $0.64 in dividends received back in January 2012. The time seems right with the markets seemingly expensive and since I almost hit $1k in dividends in the first quarter, I guess that's a good enough number to be considered significant. For the rest of this year I expect to be over $1k every quarter and hopefully much higher when the fourth quarter rolls around.
So I've turned off automatic reinvestment for all of my positions and will be collecting them all in cash. There's still some dividends that will be reinvested because I made the change after the ex-dividend date which is the cutoff that my broker has for making the decision. But by the end of May almost every single position will be swapped over to collect in my account. I'm still a bit torn on some of my positions that I consider to be the core of my portfolio and might turn the automatic reinvestment back on for those core holdings at some point in the future.
I think this will allow me to make sure that I'm getting a good value, at least in my opinion, on all cash that gets invested. As a dividend growth investor looking to reach financial independence fairly early, I need all the help I can get and making sure I get value with every single penny in my account is one way to do so.
Do you automatically reinvest your dividends or collect them and selectively deploy that capital? Do you have automatic reinvestment on for just your core holdings?
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