I recently outlined my case for using a Dividend Reinvestment Plan here at Seeking Alpha. In this article, I will take a look at the factors that suggest it may not always be the best plan to use a Dividend Reinvestment Plan (DRIP).
Buying Better Value
The top reason why you may not want to use a DRIP is if you are a seasoned investor who can identify value and times of opportunity versus blind, investing on a regular basis.
DRIPs typically are used for automatic reinvestment of dividends, regardless of share price. A seasoned investor might instead choose to let dividends pool and when an attractive buying opportunity presents itself, allocate the collected cash at irregular intervals rather than consistent monthly or quarterly intervals.
Now, most investors can't accomplish this concept effectively due to a lack of market knowledge and patience. Most people should do regular reinvesting, but if a seasoned investor has shown an ability to identify quality entry points, he or she may decide to take control of when to reinvest dividends.
A DRIP can make it very difficult to track cost basis for the positions you are building. Going back and tracking years of dividend reinvesting and contributions can be a major headache. If you choose to go the DRIP route, do yourself a favor and start tracking the cost basis immediately. Get yourself a spreadsheet and print one out and keep it in your file along with the statements you get for the DRIP program.
Not using a DRIP and instead buying shares in chunks definitely makes it easier tracking a cost basis over many years.
Times Have Changed
Many years ago, DRIP plans offered a way to get around the heavy trading fees. With the price wars of online brokerages today, the fees are pretty minimal as is. Moreover, many brokerages can reinvest dividends automatically for you, which accomplishes essentially the same thing as your DRIP plan.
Whether or not you believe a DRIP is a good vehicle for your investing depends on your personal situation. I still hold that for new investors it is a great way to get into the game and to get used to buying the stock of specific companies. For more seasoned investors, there might be better ways to eek out extra return and buying in larger chunks might eliminate some of the headache in calculating cost basis over years and decades.
Whether you "DRIP" or not is up to you, and I've heard arguments I agree with on both sides of the debate. There is one thing we all agree on though, and that is that dividend stocks are a great way to invest. Dividend reinvestment methodology is secondary to this fact.