Wednesday, March 22, 2006

On Reinvesting Dividends

Everybody always says you have to reinvest your dividends. Dollar cost averaging is another strategy I see mentioned a lot-- buying small amounts of a stock frequently and regularly and thereby averaging out the purchase price.
For the most part, I don't do either of these things.
When I first bought a mutual fund through E*Trade, I set it up so the dividends would be reinvested and I just got sick of keeping track of it, since E*Trade didn't track the reinvested dividends automatically for some reason, and I always had to update the number of shares I owned. Now they seem to have fixed that problem but on my main investment portfolio, I still don't reinvest dividends. Why?
It's still complicated to track even using Quicken, so I guess part of it is just laziness. But I also don't entirely like the idea of mindlessly buying more of something that is getting more expensive. And if it's not getting more expensive, I'm not sure I want to be owning it.
When I get dividend payouts, I transfer the money into another account, and when it's built up a bit, I just transfer it back into my brokerage account and buy another mutual fund or stock. So you could say I am reinvesting the money, but in a slightly different way.
I'm sure there are many arguments against this method, and I don't claim to be an investing genius by any means, so I'd love to hear other people's opinions on the pros and cons of each approach.


IRA said...

I reinvest my dividends because it's the cheapest way to purchase another share of a stock that I'm planning on holding onto for the long haul. If you purchase one share or 100, it typically costs about $10 for each trade. My retirement accounts are with Fidelity. If you buy a Fidelity fund, there's no service charge, but the minimum purchase is typically $250. It takes a while to build up $250 in dividends. If you buy a non-network fund (e.g., Vanguard), Fidelity charges you $75, even if it's a $250 investment. So, you might be wondering why I wouldn't just open up an account with Vanguard? Because I'm not permitted to by my employer. Vanguard is not a pre-approved brokerage firm. And whenever I buy or sell a stock, I have to pre-clear the transaction with our compliance department.

VS said...

It is better to buy mutual funds directly from "house" e.g. Vanguard/Fidelity e.g. because you don't pay any commission on it which is charged by brokerages such E*Trade. If you want to go with broker route then think about ETFs.

Second usually you have a minimum amount to buy a fund which in most cases don't apply to dividend reinvestments. Based on what you described here you may loose opportunity of better returns because return on "safe" investments such as keeping it in your brokerage account ( even for short term) would be lower than investing in stock/bond mutual funds. You my think it'll be small change.. but in long run it may come out quite significant.

samerwriter said...

I'm not a big believer in reinvesting dividends. I put nearly all income (paychecks, bonuses, dividends, interest, etc...) into a 'slush fund', which I use for emergency fund, short-term saving, and day to day expenses. This slush fund is invested in the Vanguard Prime Money Market fund, where it yields about 4.3%.

On a monthly basis I transfer money from this fund into our checking account to pay for monthly expenses, and back into our other funds.

The dividends thus provide liquidity that I can use to keep our portfolio properly allocated, without having to sell funds to accomplish this.

Laws Finance said...

I posted a follow up to your discussion at

Apollo said...

If there's one thing I've learned about the brokerage it's that they are in business to make money first and foremost for the company and everything else is secondary.

Has anyone tried adding up the multiple shares to determine how fairly they carry the 100th or 1000th decimals on the reinvested dividends?

Actually I did not bother to calculate it as the few share I initially had no DRIPs wasn't worth the effort. However I don't trust their decimals and it's much cleaner to keep dividends seperate. Also I don't need to worry about average cost basis.

As for additional purchases, it's usually in large quantities so the transaction cost is not significant.

Caitlin said...

I'm curious about your quicken you download your etrade transactions or hand input them? my dividend reinvestments are part of what is downloaded via Fidelity into quicken so it's easy peasy...the transaction is all set up properly I just hit "accept" once a year i have to (or choose) to properly categorize the capital gains type transactions as short or long accordingly but I do that just cuz i'm anal LOL

Madame X said...

It's worth noting that the funds I buy from E*Trade are almost always no-load, no-fee funds.
And I enter Etrade transactiosn into quicken by hand, as at least until now I don't think they've had a download option, though that may have changed since I last checked.

Steve Mertz said...

Reinvesting your dividends does all those good things of dollar cost averaging and lowering your cost basis but isn't it kinda cool to "see" the fruits of your investing labors! It reinforces all those reasons you invest in the first place-Enjoy

dividend growth said...

You can check this analysis of this bank. You could also scroll down and check the rest of stock analyses on GE, KO, PEP, JNJ and CINF.

Your dividend income does increase faster when you reinvest. This is called compounding. If your dividends are increasing as well that's a double compounding.

Another example to keep reinvesting those dividends. If you invested $1000 in VFINX ( the vanguard S&P 500 index fund) in 1977 and you spent all of the dividends each year, your dividend income for 2007 would have been around $200. If you had reinvested your dividends though, your dividend income would have been much more.

I do realize that there are some legitimate reasons for not reinvesting dividends, such as
- you need the money
- you own too much of a certain stock in your portfolio so you decide to allocate the dividends somewhere else

Andy said...

Great question. I just wrote a post on this very topic and if you are holding onto the stock of a company and they offer a DRIP then the only reason you would NOT participate is if you believe the compnay's future is bleak. Then you need to ask yourself the question as to why you are still invested in the company.