Friday, April 18, 2014

Reinvest or Pool?


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?


Photo credit: FreeDigitalPhotos.net

20 comments:

  1. I collect the cash. The only security where I automatically reinvest is in my DRIP program for BNS. I am trying to increase my cash position in the last couple of months - hoping for a better valuation to invest.

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    1. R2R,

      It makes the most sense to collect them in cash while in the accumulation phase in most situations. The only way I don't see it being the right move is if the companies you own are all undervalued, like most companies a few years back, or you have very little cash to contribute or it's not on a regular basis. If you're making additional investments every month, it makes sense to get as much value as possible. Although I did like to see my position sizes grow through the reinvestment.

      Thanks for stopping by!

      Delete
  2. I auto reinvested until about 18 months ago. I stopped, figuring at that point in the market cycle my core holdings were pretty fairly valued. Now I let my cash build and make tactical investments. Plus, weren't you letting your cash build for a rental house?
    -Bryan

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    1. Bryan,

      I'm more inclined to want to be more strategic with my capital. Especially since that $1k per quarter is almost enough for an additional buy each quarter. Over time the value will prove itself, although seeing my positions increase every quarter was pretty good.

      I'm still kind of building cash for a rental. I'd still love to own one if I can find the right situation but I think it's just going to be too difficult to really pursue one on the open market. There's no way I'm going to make that big of a financial commitment without walking through the property beforehand and most of the ones that I've found that are listed usually get under contract while I'm at work. The opportunity for me to be a bit more nimble and aggressive in my search isn't there due to work. I think going through a turnkey company is my only real option. My plan when I'm off work next month is to meet with as many as possible and hopefully see a few of the properties they have and the scopes of work that they did. I'm sitting on around $30k cash across all of my accounts and these dividends will help to build that up a bit more.

      Thanks for stopping by!

      Delete
  3. My path is the same as yours. I began collection cash on a few of the stocks I bought when I first started investing that weren't as financially sound (NLY for example). Then later I switched over to accumulating cash to buy new positions. I think the cash route is a good option for me because I own far too few positions right now - I need to approximately double or triple my positions to get a good diversification. Once I have 30-40 stocks in my portfolio, I may reconsider automatic reinvestment.

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  4. WE,

    Mainly I was reinvesting the dividends other than a few that seemed a bit riskier or the dividend "culture" hadn't really been established yet within the BoD and management.

    Thanks for stopping by!

    ReplyDelete
  5. I think it's much better to collect dividends and buy shares selectively. With this way I can select my investments, I (hope) do the right decision when I purchase new shares. I used to add dividends to my monthly contributions.

    ReplyDelete
    Replies
    1. New Life,

      There's advantages and disadvantages to both but I think right now it's best to collect and selectively reinvest with new capital. I'm still thinking of turning it back on for a few select positions.

      Thanks for stopping by!

      Delete
  6. I drip all holdings. Chowder explains why to do so much better than I could...

    http://seekingalpha.com/instablog/728729-chowder/1627581-dividend-reinvestment-yes-or-no

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    Replies
    1. Interesting read there. I have LOTS of respect for Chowder and agree with 99.999% of what he says, but his logic is flawed with this one.

      #1) He doesn't add reinvested dividends to his cost basis. Each reinvested dividend increases your cost basis. Period. His MMP example is skewed beyond belief. As the price went up, each reinvested dividend made his CAGR lower, not higher...

      #2) I don't have to use pooled dividends to only purchase the most undervalued companies. I don't know where he got that idea... I'm personally willing to pay up for quality and I don't have to auto reinvest to get more shares of companies like KO or PEP. You know, companies that always sell at a premium.

      #3) It's way way easier to keep my portfolio balanced taking dividends as cash. Auto reinvesting makes it harder!

      That said, there is nothing wrong with DRIPing and I have nothing against it. Promise. I use it for a couple positions to take advantage of reinvestment discounts.

      Delete
    2. Anon,

      That's an interesting read from Chowder and thanks for sharing it. I see the pros and cons for both. It's a big pro to automatically reinvest and continually increase your income whether you find value in the markets or not. And I didn't even realize that some of the discounts were passed along. That's definitely nice so now I need to go and check all of my holdings to see which offer discounts. For now I think I'll keep most of them turned off and see how I feel about it. Although with some of the highest quality companies I might be turning it back on. Definitely something to think about.

      Thanks for stopping by!

      Delete
  7. I pool unless there it's at least a 3% discount attached to the DRIP. No magic to that %, just a number which gives me enough incentive to DRIP.

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    1. DoD,

      I didn't realize that some of the discounts were passed along. That's definitely an incentive to have the DRIP turned on.

      Thanks for stopping by!

      Delete
  8. I collect all the dividends in cash in my taxable accounts and combine them with new money each month to make additional purchases. With my Roth I DRIP everything since I'm only making a small handful of trades each year and I'd rather to put those dividends back to work for me right away.

    Have a great weekend,
    SFZ

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    Replies
    1. SFZ,

      I'm reinvesting everything in my Roth as well because of the same reason.

      Thanks for stopping by!

      Delete
  9. Like a lot of the other readers, I agree with your particular call, however, that is not what I do. I try to make one purchase a month in the $600 to $1000 range whether I have the money or not in the account (small margin line currently at $1,600 or so). Knowing myself I believe that if I let it accrue in cash it would just be used to pay off the margin thus not actually reinvesting.

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    Replies
    1. Evan,

      I still like automatic reinvestment because whether I find companies at compelling prices or not I'm getting some capital invested each and every month. The main goal is to consistently increase my dividend payments and the automatic reinvestment accomplishes that very easily and without building up a large cash pile too much right now. I'm going to give it one or two quarters to see how I feel.

      Thanks for stopping by!

      Delete
  10. I recently turned off automatic reinvestment for most of my positions. There are a few I still do though. OHI is one because you get a 1% discount on reinvested money, now that may not matter based on valuation, but its free money.

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    1. ILG,

      I need to go through all of my holdings to see which ones offer a discount and how much it is. If it's over 1% I think it'd be well worth the reinvestment even if it's a bit more of a hassle if I have to sell shares.

      Thanks for stopping by!

      Delete
  11. Thanks for the insight on the topic. It is something my friend and I have been discussing recently. What has prevented me from turning off my automic reinvestment features is my projected annual dividend income. I currently am projected to earn $1,380 in dividends during the fiscal period. This amount doesn't quite reach my self mandated minimum purchase amount; so as of now I will maintain the automatic investing feature. However, one day when I reach a level of $1k of dividends per quarter pooling cash for a new undervalued investment.

    Best of luck with your new strategy. Keep us updated, I am very interested to see how well this strategy works for you.

    -Bert, One of the Dividend Diplomats

    ReplyDelete