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My primary objective is income replacement! ... The objective is to start earning an income stream now, to replace the income that will be earned throughout the working years. I want that income to be reliable, predictable and increasing. The income stream will need to continue to grow to stay... More
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  • Dividend Reinvestment - Yes Or No? 86 comments
    Mar 7, 2013 6:19 PM

    There have been many articles and comments written on SA about whether it is better to collect your dividends in cash or to reinvest them back into the underlying company. This instablog is going to take this subject head on.

    Dividend reinvestment (DRIP) was created as a tool for long-term investors. The concept was developed to allow for the "compounding" of dividends and to allow investors to purchase additional shares in a company at no cost. The concept was to allow a passive approach to building a position, and just as importantly, to force you to continue investing, regardless of market conditions, which in essence takes emotion out of the equation once you have ownership in a company.

    Let me begin by saying some people are not in a position to fully take advantage of a DRIP program. Some rely on their dividends to support their lifestyle and whatever is left over is selectively invested.

    Some people who consider themselves dividend growth investors have accounts they no longer contribute cash to, and the only way they can add positions and diversify their portfolio is to collect all dividends in cash, and then open a new position.

    There may be other scenario's I haven't mentioned.

    This instablog is not designed for that group of investors. This instablog is designed for those of you who are dividend growth investors, have an increasing dividend income stream as a priority, and are still contributing cash into your portfolio on a regular basis.

    Like anything else in life, and in your investing career, it all starts with your goals. What are you trying to accomplish? You can have a series of specific goals, but you must prioritize them. Which of them are most important to you?

    The objectives that a lot of dividend growth investors have are, the safety of the dividend, growth of the dividend, and the value of their position. Is the position rising in value? In other words, what is the total return?

    I think most dividend growth investors would say they want growth and income.

    Most investors I think, equate growth to mean the total value of their portfolio. Growth and Income is a code word for total return. I think that's the goal for most dividend growth investors over the long run. The problem is that there are times when these two criteria are in conflict with each other. There are going to be times when share price is dropping 10%, 20% or more, yet the dividend income continues to rise. So, which has priority? Growth or Income?

    You need to know the answer to that question whether you use a selective dividend reinvestment strategy or an automatic dividend reinvestment strategy. There is no wrong answer. It's based on what you are trying to accomplish. The only wrong answer is, "I don't know," in other words, uncertainty. So, what's your number one priority?

    In my case, I'm looking for total return over the long run. In fact, the formula I use in my stock selection process is:

    High Quality + High Current Yield + High Growth of Yield = High Total Return.

    Once I'm in the position, I switch my recruiter hat to my manager hat. I now must manage the position. What is the priority? Growth or Income?

    This is where you must establish your "Mission Statement." Your company motto, if you will. Once you have a "Mission Statement," every decision you make must be support your motto.

    Ford said, "Quality is job #1." ... The Marine Corps says, "Looking For A Few Good Men." ... Realty Income (NYSE:O) says, "The Monthly Dividend Company." ... My "Mission Statement" declares, "To build an income stream that is reliable, predictable and increasing."

    There you have it! I chose income over growth as a priority, but I believe I will get both over the long run. I simply have to insure that all of my short to intermediate term decisions support my Mission Statement. As long as I stick to this, I believe I will get high total return.

    Let's talk strategy.

    A lot of people prefer the selective dividend reinvestment approach. This is where you collect your dividends in cash and then you selectively purchase undervalued companies. Again, some of you are in a position where this is really your best option, so don't take offense to my following comments. They are not directed at you.

    To those of you who are contributing cash to your portfolio on a regular basis, and an increasing income stream is important to you, for you to choose selective dividend reinvestment is Crazy Thinking. I'll present my case as I go.

    One of my concerns with selective reinvestment is that we are purchasing undervalued companies with the dividends and new cash. We are talking about investing 100% of all available cash options and devoting it to undervalued companies. Are all of your choices successful? If you are going "all in" with cash and dividends, you need to be sure, I would think. If you are that sure, why not sell off some of your other positions and devote even more cash into your new undervalued position?

    I own 40 plus companies, some overvalued, some undervalued. I can't tell you which ones will perform the best over the next 12 months, or the next 2-3 years for that matter. So, I diversify my cash flow. Dividends get reinvested into the underlying companies and the new cash goes to the best undervalued opportunities. Balance is what Im looking for!

    Let's talk about overvaluation.

    People have this incredible fear of reinvesting dividends into overvalued companies. ... People! Let's stop and think for a moment.

    I agree that when you purchase a company, valuation is very important because of the amount of cash going into the position and this will impact your long term total return. You may be looking at buying 200, 500, 1000 shares or more so your initial price carries weight.

    Let's move to the next step! When you receive your dividends, how many shares are they buying if you reinvest the dividends? Is it 3 shares? 5 shares? 8 shares? How much impact are those shares going to have on your cost basis if they are reinvested into an overvalued position? Is that going to decimate your total return? ... Really?

    Your reinvested shares, as you go forward, will be in various price ranges. It all works out in the end and you don't have to guess at it.

    With the way the market flows up and down, reinvested dividends into an overvalued company isn't going to negatively affect your cost basis over the long term, but it will provide a steady and increasing flow of income.

    Let's talk about Core positions.

    In looking at the formula for stock selection that I listed above, I want to own "High Quality" companies, especially since we are talking about Core positions. These are the companies that are the backbone, or the foundation of my portfolio. These are companies like KO, CL, ADP, MCD, PNY and others. These companies almost always sell at a premium. It takes a major recession just to bring them down to fair value, never mind under value. How do I build my core positions if all I do is purchase undervalued companies?

    If I'm ever in a position where the dividends aren't enough to meet expenses, and I must liquidate some of my companies, my Core positions are the last thing I wish to sell. I'd prefer to keep the Core and continue to draw those reliable dividends for income.

    If I'm not adding to my Core positions because they are always selling at a premium, it means I have less reliable income to count on. I'm of the opinion that Core positions should always be dripped.

    Let's talk about weightings.

    One of the responsibilities of managing a portfolio successfully, I would think, is to minimize the damage any one position can do to your portfolio value. For a more detailed analysis on proper weighting, you can find my analysis here:

    seekingalpha.com/instablog/728729-chowde...-weightings

    If all you do is reinvest in undervalued companies, how do you keep your positions relatively weighted? Your best performers are going to be your smaller sized positions and you are going to sit there and say, "I wish I owned more." Go ahead, admit it. You've been there, done that. That doesn't compute with me. The strong often get stronger!

    Your overvalued positions are usually your more successful positions. It's the reason they are usually overvalued. ... Ha!

    If I discontinue reinvesting in the companies that outperform, then 100% of available cash, dividends plus contributions, are going into underperformer's. From my point of view, that's Crazy Thinking. I think reinvesting back into your winners and using your new cash to buy undervalued companies is a more balanced approach.

    Let's talk income flows.

    Let us keep in mind that the purpose of DRIP investing is to get the power of "compounding" income flow in your favor. If you have selected a high quality company that tends to raise their dividend every year, you are in essence turbo charging your income flow. Case in point:

    Two and a half years ago, I purchased a position in MMP for Project $3 Million. This is an online portfolio that I manage for a 28 year old, so the history is short, but the lessons apply.

    Project $3 Million:

    project3million.blogspot.com/

    Since I made the purchase, MMP has had eight 52 week highs over that time frame. You heard me right. Eight 52 week highs in less than 3 years.

    Chart:

    stockcharts.com/h-sc/ui?s=MMP&p=W&am...;id=p78725805841

    During that time frame, there have been 10 distributions, which have been reinvested. If I were using the selective dividend reinvestment strategy, there would not have been any additional buys in MMP. Yet, I know the strong often get stronger and I ignored the overvaluations and kept reinvesting. Here are the results, and keep in mind, this is real, not theory or an academic study.

    The distribution growth, including reinvestment, shows that the distribution income grew 50.1% in just 2 1/2 years. That's a compounded annual growth rate (OTCPK:CAGR) of 17.64%. Think about it!

    If the distributions were simply collected and selectively reinvested elsewhere, the CAGR for MMP would have been 9.9%. Not bad, but look what you gave up? What are the odds of your undervalued selection making up the difference?

    Want to talk total return? MMP is the best performing company in the portfolio. It's up 82%, at the time I wrote this instablog, in just 2 1/2 years and the reinvested distributions had an impact on that. Those distributions were reinvested back into MMP and the whole time they were overvalued. The strong often get stronger.

    If a company is so overvalued that you are afraid to reinvest the dividends, then perhaps you should sell your position and lock your gains in. That's what I did with VFC and MKC as described here:

    seekingalpha.com/instablog/728729-chowde...-selling

    As I stated earlier in this instablog, the income has priority with me when growth and income are in conflict with each other. My Mission Statement declares that I, "build an income stream that is reliable, predictable and increasing." Automatic dividend reinvestment insures that, regardless of market conditions!

    Let's talk downgrading yields.

    If I'm selectively reinvesting, based on valuations, I may be taking a 5% yield dividend and end up purchasing a 3% dividend yield. I'm deliberately slowing down my dividend growth rate. If I choose to hold the cash until a 5% yield company becomes available, I'm not earning anything on that cash, it's not compounding!

    Taking a 5% yield dividend from a high quality company and buying a 3% yield company, in my opinion, is Crazy Thinking. Why not use your cash contributions for that. Let your dividends reinvest and compound, especially since you don't know in advance who your best performing companies are going to be over the next 12 months or more.

    Let's talk ownership rights.

    If you want ownership rights in a high quality company, you are going to have to pay a premium for them because reliability and predictability doesn't come cheap. When a company is almost always selling at a premium, the market is telling you it's a Blue Chip and it's worth it's weight in gold for those of you who will end up relying on the dividends for income.

    Let's talk reality.

    I will use results from Project $3 Million because it's easy to confirm since the portfolio is public. There isn't any reversionary history here. The portfolio was established at the end of 2008. The first dividend didn't show up until 2009.

    I know this is short term (3 years), but it still shows the power of automatic dividend reinvestment. The cash dividends received vs the reinvested dividends are real and are a fair comparison. So, keep in mind, if you are selectively reinvesting, your selection must make up the difference to compete with automatic reinvesting.

    There are 5 positions in the portfolio which have not had funds added to the position over the last 3 years. The only action has been to reinvest the dividends. Some are overvalued, some not. The results are what they are.

    I will show the total dividend growth followed by the 3 year CAGR with dividends reinvested and then the 3 year CAGR dividends taken as cash.

    Company .. $$ growth ... 3 yr CAGR/ reinv. ... 3 yr CAGR/cash

    KO .......... 34.6% ......... 10.41% ................ 7.55%

    CL .......... 51.2% ......... 14.77% ................ 12.26%

    JNJ ......... 37.2% ......... 11.11% ................ 7.59%

    ADP ........ 38.9% ......... 11.57% ................ 6.82%

    MO ......... 47.3% ......... 13.77% ................ 8.81%

    These are Core positions and I think the difference between automatic dividend reinvestment and selective reinvestment is considerable, and we're still talking short term. I can't begin to imagine what the long term results are going to look like as the dividends continue to grow.

    Keep in mind, when selectively reinvesting, you must find equal high quality, equal dividend yield, equal dividend growth and make up the difference for the compounded annual growth rate, and you're going to have to do it with a company currently underperforming. If you don't, your taking a step back.

    I say reinvest the dividends and use new cash for purchasing undervalued positions.

    To DRIP or not to DRIP? ... You tell me.

Back To chowder's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (86)
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  • Iwant2fly
    , contributor
    Comments (338) | Send Message
     
    Another great piece for though and discussion! Thanks again chowder.
    7 Mar 2013, 06:26 PM Reply Like
  • DanielleEmberley
    , contributor
    Comments (76) | Send Message
     
    I would think strategy would very depending on whether funds were in a taxable account or not. Somehow keeping track of all these dividend re-investments in a taxable account just seems a little too complex for me.
    7 Mar 2013, 06:39 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Danielle, I have dividends in both taxable and tax deferred accounts. My brokerage firm tracks the cost basis now. Every single reinvested transaction!

     

    That law was passed a year or two ago. It's so easy to keep up with now, even I can do it. ... Ha!

     

    My CPA was delighted at how easy it is now.
    7 Mar 2013, 06:48 PM Reply Like
  • Guitar Man
    , contributor
    Comments (228) | Send Message
     
    Great article, Chowder. Touches every base re dividend reinvestment.

     

    You already hit on my main reason for what I have chosen to do, but I'll mention it anyway.

     

    I'm retired. I reinvest all dividends into the security that produced them. Why?

     

    1) I've done my research and, regardless over under- or overvaluation, I'm comfortable with the companies I own (and, so, I am comfortable reinvesting all divs into the same security).

     

    2) I believe in the power of what I often refer to as "hypercompounding": reinvesting dividends produced by companies which raise that very dividend each and every year. It's like compounding on steroids.

     

    3) I'm not taking dividends in cash (yet), so that makes my primary goal quite simple (for me): create the largest stream of (potential) future income possible with the capital I currently have. Each year, barring none, the total income produced by my dividend-paying securities increases by some percentage and dollar amount. Dividend increases and reinvestments are both important drivers/components of those annual increases. Once I'm deeper into my retirement (I'm only three years into it so far), I'll stop the reinvestments and take the income. I'm not sure when that'll be at this time, but I'm confident the income stream will be higher than it is today. Key point: I don't care where the stock market is or where it will be (at that future date); as long as my income stream keeps rising.

     

    4) As you mentioned, reinvesting in the security that produced the dividend removes the emotion and decision-making from the process. It's not for everyone, but it works for me.

     

    5) New cash, when available, goes to either new ideas or existing ideas which continue to represent good value.

     

    That's it. Pretty simple. Again, thank you for your excellent contribution via this and your other articles.
    7 Mar 2013, 09:02 PM Reply Like
  • cajman
    , contributor
    Comments (22) | Send Message
     
    I agree that if you have new money flowing in, turn on dividend re-investment. However, I have an IRA with no new money flowing into it. I'm currently collecting the dividends and making a purchase when total exceeds $1000. I'm really struggling with drip or not decision as I can relate to your example with MMP. For example, I own MAIN and it's up 80% without dividend re-investment. My original purchase was a 1/2 position but should I sell? I love the stock so I continue to hold. Again, another decision I struggle with.

     

    Thanks for your writings as I've learned a lot from you and others here.
    7 Mar 2013, 10:54 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (3182) | Send Message
     
    Good article, Chowder - thank you.

     

    As far as I know one aspect of classical DRIP was not covered in SA:In case of classical DRIP as far as I understand the company is custodian for all your shares and it is probably more difficult IMO to liquidate position urgently to compare with regular brokerage. I hope this situation will never occurs for any DGi but IMO such risk should be considered.
    Am I totally wrong (I don't do DRIP and never investigated it seriously)?
    SDS
    7 Mar 2013, 11:41 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » SDS, if you DRIP directly with the company, you are correct. I used to do that, but now all of my dividends are reinvested through my broker and they track all the transactions for tax purposes.
    8 Mar 2013, 07:29 AM Reply Like
  • jamesfranklin1
    , contributor
    Comments (3) | Send Message
     
    Wonderful article, even a year later. I have two thoughts on this issue, which I'd love to hear your comments on:
    1 - I have a couple companies I do traditional DRIP investing with because I like to do regular cash investment and this way there is no brokerage fee (some companies also give a discount). So how can you match that no-fee situation using a brokerage?

     

    2- As a semi-answer, I opened a Sharebuilder account that let me invest in 12 stocks monthly for $12. It was great.. except they discontinued it. Do you know of anything similar or another answer to question 1?
    11 Aug, 05:44 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » I think Scottrade has a similar plan called FRIP. I don't know the particulars as I don't use them. I've read comments by others.
    11 Aug, 11:13 PM Reply Like
  • Ben Dean
    , contributor
    Comments (24) | Send Message
     
    Very thorough post. I really liked this part-
    DRIP "forces you to continue investing, regardless of market conditions, which in essence takes emotion out of the equation once you have ownership in a company"

     

    I DRIP everything.

     

    I sold MMP last year, that was a mistake. I'll admit it- holding onto winners, well for some reason, that is hard. MMP has done ridiculously well and from everything I've read it should continue to do so for quite some time.
    8 Mar 2013, 01:42 AM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Ben, in a couple of weeks, I'll get around to showing you some techniques to help you decide whether you should let your winners run or take some profits off the table. No more guessing. ... Ha!

     

    I'll try to explain it in simple terms so most people can easily track their positions.
    8 Mar 2013, 07:33 AM Reply Like
  • Iwant2fly
    , contributor
    Comments (338) | Send Message
     
    chowder,
    I'm waiting anxiously for that post. That is a tough one.
    8 Mar 2013, 08:08 AM Reply Like
  • MonkeyDo
    , contributor
    Comments (19) | Send Message
     
    I'm also awaiting more of these "how to" articles from you. The information you're giving is tremedously undervalued here...I'm backing up the truck and loading up on Chowder.
    8 Mar 2013, 03:22 PM Reply Like
  • Zalach
    , contributor
    Comments (101) | Send Message
     
    Thoughtful read Chowder... thank you!

     

    What are your thoughts on DRIP fees? For example, HCN gives you a 5% bonus for drip'in', while DRI charges.

     

    HCN is a no brainer... that one is should be on by default!

     

    But DRI charging to drip doesn't make sense to me. It's like taking a 3% yield and covertly making it 2.7%. False advertising I say!

     

    Those are a made up numbers by the way, I looked on their site and couldn't find it listed. I just picked up DRI after the Jan. 8th dividend so I'm not sure what it will look like yet.

     

    I suppose if the fee isn't that steep, then it's rather moot. I only have 50 shares of it. So if they charge 2% to reinvest $25 that's .50 cents. It will take 14 dividend reinvestment cycles over 3.5 years to equal one $7 commission charge which would be for $350 worth of stock. I usually buy in 1k chunks (I'm small potatoes!). Hmmm even walking through those numbers leaves me with mixed thoughts, I don't like paying fees if I don't have to!

     

    Curious as to people's thoughts on this aspect of drip'ing...

     

    and Chowder, you and Percy must watch a bit of soccer! I'm jealous, I've got no time for that!!! I lived in Germany and was a huge 1FCK fan... got to see some games in person, great times! Speaking of time, thanks for sharing your thoughts. Very interesting to read, thanks Chowder.

     

    ~Zal
    8 Mar 2013, 03:17 AM Reply Like
  • David Fish
    , contributor
    Comments (7454) | Send Message
     
    Zal, You and SDS touched on a distinction that often gets ignored: The difference between company-sponsored DRIPs and brokerage reinvestment. Much of what Chowder (and others) discuss is predicated on the dividend reinvestment function of their brokerage accounts, and brokers have done a great job of co-opting the term "DRIP," which was the universal term long applied to company-sponsored Dividend Reinvestment (and Stock Purchase) Plans, which I consider "real" DRIPs, whereas the brokerage "DRIPs" might also be called pseudo-DRIPs.
    The differences are important:
    With "real" company-sponsored DRIPs, you don't have to have a brokerage account. These plans have long been perfect for small investors because, in addition to reinvesting dividends, you can invest small amounts, such as $25, $50, or $100, sometimes even $10 or less. Many people actually consider the cash purchase feature more important than the reinvestment feature because they are starting small. (Buying a "round lot" (100 shares) is just a pipe dream for many beginning investors!)
    Unfortunately, over the past 10-15 years, many "real" DRIPs have added purchase fees, often in junction with adopting "cookie-cutter" plans at the behest of the handful of transfer agents that handle most DRIPs. Most often, that means paying a fee of $2.50 or $5 to make a purchase of $50 or more. Some even charge a fee for dividend reinvestment, although many do not. Paying a $5 fee means losing 10% instantly from a $50 purchase, so some people have adapted by making purchases of $250-500 in order to minimize the fee's impact. In junction with these fee-based plans, many company DRIPs have Direct Enrollment, most often with an initial set-up fee of $15 on a minimum investment of $500. So these "real" DRIPs are still largely appropriate for small investors who aren't (yet) buying thousands of dollars worth of stock through a brokerage, and there are still many well-known companies that offer no-fee DRIPs, such as 3M, Aflac, Johnson & Johnson, etc.
    The main drawback to brokerage "DRIPs" is that while they may offer free reinvestment of dividends, there's no cash purchase feature. If you want to buy m ore shares with cash, you have to pay the regular commissions. Purchases are immediate, whereas the "real" DRIPs may buy shares (and fractions) on a weekly or monthly basis. Of course, immediate purchases also suffer from psychological influences, such as buying as a stock is hitting a high, so a delay can also be beneficial if it means a better price.
    8 Mar 2013, 05:59 AM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » David, thanks for providing some color to the differences between company sponsored DRIP's and brokerage dividend reinvestment.
    8 Mar 2013, 07:38 AM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Zalach, all of my positions are purchased through my brokerage firms. I use Fidelity and TD Ameritrade. They don't charge any fees for dividend reinvestment. I own DRI and there were no fees. Any fees you pay are when you deal directly with the company sponsored DRIP.

     

    I also get the discount on HCN and others as well through my brokerage firms. Some brokerage firms will not pass the discount along. Scottrade is one of them, and I don't think Vanguard passes the discount along, but I'm unsure about them.

     

    When my dividends get reinvested, you'd be surprised how many times my reinvested price is below the market price, and this is with companies that don't provide a discount.

     

    There have been times when I was reinvested above the market price.

     

    Here is how both of my brokerage firms determine what price to charge when reinvesting the dividend.

     

    TD Ameritrade:

     

    Thank you for your inquiry. At market open on the business day after the pay date, we place a market order for all the DRIP shares we need to purchase. The average fill price for these orders is what will show on your account. Please contact us again if you have any additional questions.

     

    Fidelity:

     

    Thank you for contacting us regarding the dividend reinvestment price. I am happy to answer your question.

     

    Dividend reinvestments are priced at the average price that the security is purchased by Fidelity.

     

    Fidelity pre-identifies all customers that will be reinvesting their dividend and goes to the market to purchase shares three days prior to the payable date. We purchase as many shares as possible on a best-efforts basis, determine the average share price, and reallocate these shares proportionately to the customers that are reinvesting their dividend. This process typically results in a different reinvestment price than the price that the security is currently trading.
    8 Mar 2013, 07:45 AM Reply Like
  • kolpin
    , contributor
    Comments (1001) | Send Message
     
    Chowder--I am also a Fidelity investor. so would you and I get the same share price for dividend reinvestment, or could it possibly be slightly different? not that it really matters, but curious. I've never checked on my HCN and OHI discounts either...do you know if that's automatic?

     

    One thing I've noticed with Fidelity dividend reinvestment is that you need to choose that option for the particular stock a few days before the ex-dividend date, or it will deposit it as cash. It becomes an issue when you purchase a new stock the day before the ex-dividend date in order to capture the dividend, and you're not able to select the divvy reinvestment option in time. I've missed out on a couple DRIPS that way.
    8 Mar 2013, 02:42 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » kolpin, we should be getting the same price on the reinvestment.

     

    You are getting your discount on the reinvested share price with OHI and HCN. That's why they don't show up in your account right away. They have to wait until the company gives the discount price,

     

    Look at your dividend history. HCN paid the dividend on 2/20, but it didn't show up as reinvested in your account until this week. It normally only takes a few days, I don't know why it took as long as it did this time.

     

    The discount was retroactive back to 2/20.
    8 Mar 2013, 03:31 PM Reply Like
  • kolpin
    , contributor
    Comments (1001) | Send Message
     
    I did notice that...I was going to call my rep and ask about it, just around the time my HCN divy showed up in my account.
    8 Mar 2013, 04:11 PM Reply Like
  • 10719291
    , contributor
    Comments (21) | Send Message
     
    Chowder and Kolpin I only use Fidelity where I have a Brokerage, Roth IRA and a Rollover IRA. I have all three accounts set to automatic reinvest dividends, so when I buy a new holding the day before ex dividend it is automatically enrolled into reinvestment. with fidelity I was not aware they pre buy before the pay date.that might be way on most stocks the pay day I have a pending posting, but if you hold a ADR or other non US stock I know there is a delay they do not buy until they have the dividend in hand and then buy the next business day.
    28 Dec 2013, 09:00 AM Reply Like
  • DanielleEmberley
    , contributor
    Comments (76) | Send Message
     
    I get the impression the brokerages are not really encouraging people to do the DRIP investing. I just looked at my online brokerage and see you have to email or call them. You would think if they were really encouraging this they would make it something that you could do on line with a check box without having to call or write a separate email. Perhaps there is just not that much demand for the service? Yesterday, I was looking at the stock GSK after seeing it listed as a Strong Buy. I noticed how over time the P/E ratio seemed to have very little fluctuation. With the relatively constant P/E ratio, I thought this would be a good one to DRIP. Whether it's a stock that really fits my needs is another question.
    8 Mar 2013, 07:39 AM Reply Like
  • jaych79
    , contributor
    Comments (506) | Send Message
     
    I have Fidelity and TD. With TD I had to email them but with Fidelity you just go through a drop down menu which takes you to a screen and you can fill out the request yourself which then enrolls you without email or phone.
    8 Mar 2013, 11:32 AM Reply Like
  • Stephen J Melnykevich
    , contributor
    Comments (1227) | Send Message
     
    Same with sharebuilder
    8 Mar 2013, 11:58 AM Reply Like
  • BigIslandBum
    , contributor
    Comments (408) | Send Message
     
    Schwab has a "Reinvest Dividends?" column on their site. Simply click on it to toggle "yes/no".
    8 Mar 2013, 12:20 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Danielle, all I did was send an e-mail asking them to set me up for 100% reinvestment. It was painless. You can ask for company specific reinvestment as well.

     

    I was invested in HCN and I noticed I didn't get my discount on the reinvested shares, so I sent an e-mail to TD Ameritrade and asked what the problem was.

     

    I received a kind response that they weren't aware that HCN provided a discount on reinvested shares and they told me they would have their research department look into it.

     

    I received a follow up e-mail apologizing for their error and they found out HCN does indeed offer a discount. So, they started providing it to all HCN share owners. ... Ha!

     

    I also get discounts on EPD, OHI and PNY.

     

    If they didn't want you to reinvest dividends, they wouldn't pass the discounts along. They don't have to do that. Some brokerage firms won't.
    8 Mar 2013, 01:59 PM Reply Like
  • DanielleEmberley
    , contributor
    Comments (76) | Send Message
     
    Thanks Chowder, That information is helpful to me. Right now I think I would be selective. I find this whole thread now makes me question where money to be re-invested, if not taking the DRIP approach, should be parked, until a decision is made or enough funds accumulate to make a buy. I am thinking the whole market could move while the money is parked.
    8 Mar 2013, 02:22 PM Reply Like
  • Stephen J Melnykevich
    , contributor
    Comments (1227) | Send Message
     
    That is enticing Chowder, I use Sharebuilder but since they were bought out by Capital One I have my reservations.

     

    What are the fees within your IRA account with TD. How much to purchase stock, and how are their tools?
    8 Mar 2013, 02:25 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Stephen, I think the fee for new positions is $7.95 with Fidelity and I think $9 or something with TDA. I don't pay attention to that much. I tend to focus on the bigger picture.

     

    I like both of these companies because they will pass reinvestment discounts along and they allow fractional shares. Other brokerage firms with lower fees won't do it.

     

    More importantly to me is their tracking my cost basis. I haven't seen any errors yet and others say they have to watch their low cost brokers closely for that. I'm not saying these guys don't make mistakes, I just haven't seen it yet. The couple of times I questioned them they were correct. That's all I want, even if the sales fee is a little higher than others. I'm paying for service and both have been top notch in meeting my requirements.
    8 Mar 2013, 03:41 PM Reply Like
  • Chumpmenudo
    , contributor
    Comments (622) | Send Message
     
    I mostly use Fidelity and Vanguard for my accounts. I also pay $7.95 per trade at Fidelity, but my Vanguard Brokerage account only charges $2.00 stinkin' bucks per trade ;-) The site look and format are pretty unfriendly to traders, but is fine for folks who buy and hold and only trade infrequently.

     

    Both accounts reinvest dividends free of charge, and you simply have to check a box after making a purchase.

     

    Chump
    8 Mar 2013, 06:03 PM Reply Like
  • kolpin
    , contributor
    Comments (1001) | Send Message
     
    Stephen--Fidelity will also give you up to 200 free trades for a year if you open a new account with a certain balance ($50-100k). Great, flexible customer service--they may extend the trades beyond the expiration date or split them between IRA and taxable accounts as you choose. At no extra charge, I've gone into my local office and met with my rep, and I can email her at any time with questions, and I always hear back from her the same day.

     

    That being said, I hear Interactive Brokers has $1 trades (with some nominal extra monthly fee), which is tempting. But it all depends how much you buy/sell stocks.
    8 Mar 2013, 06:18 PM Reply Like
  • MonkeyDo
    , contributor
    Comments (19) | Send Message
     
    Thanks again for the info Chowder, I have a question regarding the DRIP discounts, how does one find out which stocks offer it?

     

    Thanks in advance to anyone who can help answer this question.
    8 Mar 2013, 06:24 PM Reply Like
  • IndyDoc1
    , contributor
    Comments (106) | Send Message
     
    I transferred some of my funds to MerrillEdge ( formerly Merrill Lynch). You will get 30 free trades a month and you will get access to research from S&P , B of A and Morningstar. By the way, I do not work for B of A nor I have any relatives that work their either.
    8 Mar 2013, 06:55 PM Reply Like
  • Smarty_Pants
    , contributor
    Comments (2781) | Send Message
     
    "More importantly to me is their tracking my cost basis. I haven't seen any errors yet" - chowder

     

    I use TD Ameritrade myself and my account basis for the spin-off of ABBV from ABT is showing the full initial value for both spin-off stocks, which is obviously incorrect. I haven't contacted them about it yet. I'm kind of curious to see if they correct it eventually, and when. No biggie as I will probably sell both at once if/when the time comes.
    8 Mar 2013, 07:44 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » @MonkeyDo ... I put together a list of companies that supposedly offer a discount when you reinvest dividends.

     

    I haven't verified if the discounts are still being offered.

     

    I got the information from the 2010 Edition ... Directory of Dividend Reinvestment Plans by Charles Carlson, Editor of Drip Investor.

     

    One company offers a 10% discount to the buying price when you reinvest dividends. That company is FCF.

     

    5% DISCOUNT: (Companies I'm familiar with from my own research.)

     

    ALSK, EPD, HCP, HCN, PNY, WR, WTR

     

    3% DISCOUNT:

     

    MRO

     

    2% DISCOUNT:

     

    SJI
    ======================...

     

    Here is the remaining list:

     

    5% DISCOUNT

     

    ANCX, AEM, AMB, APC, ANH, BLL, BANR, BDN, CSE, CATY, CNBC, EDR, FBMI, HR, HIW, INDB, KMT, LSBX, MAA, MNTRA, NHP, OHI, SWWC, TDS, UMH, UBSH, UBA, VTR

     

    4% DISCOUNT:

     

    AFG

     

    3% DISCOUNT:

     

    BFS, CLP, DRE, EDE, EQY, FCCO, GRT, LRY, MPR, OCFC, PKY, SFI, SLG, SUI, X

     

    2% DISCOUNT:

     

    PLD, PULB, SSS, TSTY

     

    1% DISCOUNT:

     

    PEI

     

    Again, I haven't verified these discounts. I simply took them from the 2010 Directory of Dividend Reinvestment Plans. You may want to check their web site or fire off an e-mail to your broker to verify.
    9 Mar 2013, 07:38 AM Reply Like
  • MonkeyDo
    , contributor
    Comments (19) | Send Message
     
    Wow, I was just hoping to be pointed in the right direction. Thanks for all the information Chowder. I'll do some due diligence and see if the Directory of Dividend Reinvestment Plans has been updated. Thanks again!
    10 Mar 2013, 01:26 AM Reply Like
  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    Make sure to verify everything with the respective companies first. I happened across MRO's information and the investors page says, "From time to time, Marathon may offer up to a 3% discount*" and then on the bottom, "*Discounts are not offered at this time. Should a discount be offered, please contact Marathon's Dividend Reinvestment Plan Stock Line at 866-864-4611 for more information."

     

    I'm also not clear whether my broker (Tradeking) passes it through. Check, check, and check again, as I always say (starting...now).

     

    And, of course, it might as well go without saying, thanks again, Chowder!
    22 Mar 2013, 02:16 PM Reply Like
  • timprotech
    , contributor
    Comments (48) | Send Message
     
    OHI now only appears to give a 1% discount as per:
    http://bit.ly/13jfWO8
    17 Apr 2013, 01:19 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » I noticed that. Thanks for sharing. The discount fluctuates from time to time.
    17 Apr 2013, 02:48 PM Reply Like
  • David Fish
    , contributor
    Comments (7454) | Send Message
     
    They also have had a habit of turning on and off the cash purchase feature of their program.
    17 Apr 2013, 03:18 PM Reply Like
  • 10719291
    , contributor
    Comments (21) | Send Message
     
    actually with Fidelity you can pre set that all new investments are automatically enrolled into reinvestment, that is how I have my accounts with them set, so when I buy I know it is set up, if you don't want it to re invest you can then go and change it the next business day after take a new investment.
    28 Dec 2013, 09:03 AM Reply Like
  • panglin37075
    , contributor
    Comments (5) | Send Message
     
    Thank you chowder. This article is timely for me as I have been thinking a lot about this topic. I am going to switch my dividend collection to auto re-investment effective April 1.
    8 Mar 2013, 09:05 AM Reply Like
  • curreyr
    , contributor
    Comments (689) | Send Message
     
    "A lot of people prefer the selective dividend reinvestment approach. This is where you collect your dividends in cash and then you selectively purchase undervalued companies."

     

    I don't believe that the all those that selectively reinvest dividends *only* do so into undervalued companies.

     

    In my case I have 4 "classes", which at the moment consists of, Core (35%), Non-Core (40%) Some Funds (20%), and Cash (5%).

     

    In my case, at the moment, I selectively reinvest all income into core. When choosing which of the core position(s) are added to I factor in relative value and relative weight among other core holdings. Generally all of the core holdings get some form of reinvestment 1-2 times a year. Today was new core position (INTC) at a 25% weight to the other 11.

     

    It is true that this does tend to reduce the overall portfolio yield since in many cases the non-core holdings have higher yields (e.g. BDC, MLP, etc).
    This also tho tends to reduce the overall beta and I feel adds to a more reliable income stream for the future.
    8 Mar 2013, 11:39 AM Reply Like
  • DGyoungster
    , contributor
    Comments (21) | Send Message
     
    Any tips for those of us non USers without DRIP brokers on how to manually reinvest?
    8 Mar 2013, 02:33 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » DGyoungster, I've never thought of it since it doesn't pertain to me. Maybe SDS can share some light on this as he's live overseas,
    8 Mar 2013, 03:45 PM Reply Like
  • colodude
    , contributor
    Comments (219) | Send Message
     
    Chowder, a question: at what point will you document tax effects on the taxable account in your $3 million portfolio? Reason I ask:
    --the taxes on the dividends will soon be substantial because the account is starting to make some serious dividends. I assume this year you'd have to apply a marginal rate of 28% on the dividends of the taxable account, including the DRIP dividends. Might this ultimately force you to steer your purchases over to the Roth account?

     

    Thanks for the excellent series. Today's article did an excellent job of showing how to keep a "mission statement focus".
    8 Mar 2013, 02:42 PM Reply Like
  • cheryl1028
    , contributor
    Comments (135) | Send Message
     
    OK Chowder, you've done it now!!!! I've decided I must/need to print out all of your posts and highlight the salient points so I can continue to read, review, practice and implement!!!!
    I am currently using Scottrade which does not offer dividend reinvestment with the exception of mutual fund....of which I have FCISX and have had for many years. I used to drip but changed last year as I wanted to use dividends, and principal and interest from Ginnie Maes to "selectively reinvest" and grow my diversification. I've been able to add 5 new positions since then (MCD, LMT, KRFT, AFL, O) but I've been thinking of reinvesting dividends for my core holdings. What discount broker do you and others recommend who both offer reinvestment with company discounts and also offer the best research and tools???? Sorry Chowder, most charts are Greek to me all but the basic. However due to your tutelage I'm trying to learn and understand a little each day.

     

    Your humble and inspired student!!!!
    Grasshopper (i.,e Cheryl)
    8 Mar 2013, 03:41 PM Reply Like
  • IndyDoc1
    , contributor
    Comments (106) | Send Message
     
    Cheryl,

     

    I am re-posting my comments earlier.

     

    I transferred some of my funds to MerrillEdge ( formerly Merrill Lynch). You will get 30 free trades a month and you will get access to research from S&P , B of A and Morningstar. By the way, I do not work for B of A nor I have any relatives that work their either.
    8 Mar 2013, 07:03 PM Reply Like
  • cheryl1028
    , contributor
    Comments (135) | Send Message
     
    Indy,
    Thank you!! I will be investigating this week... Dang, that Chowder really makes me work hard!!! At least I'm the beneficiary and accountable to no one but me!!!! Kinda nice :)
    9 Mar 2013, 10:31 AM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » colodude, going forward, most of that $6,000 cash contribution will be going into the Roth.

     

    The objective was to build up the taxable account first, and then start the Roth.

     

    The Project $3 Million portfolio belongs to a 28 year old person who only makes $35K per year. He has a ways to go before the taxes will hurt him. Even with his dividend income being taxed, he still gets a tax refund check.

     

    I haven't received a tax refund in 40 years. I wouldn't know how that felt! ... Ha!
    8 Mar 2013, 03:50 PM Reply Like
  • Stephen J Melnykevich
    , contributor
    Comments (1227) | Send Message
     
    Not as good as receiving more in dividends per year than you would a tax return. I'm on my way and I hope to join your side of the tax return isle...or lack of a return.
    8 Mar 2013, 04:01 PM Reply Like
  • colodude
    , contributor
    Comments (219) | Send Message
     
    Smart tax planning!
    8 Mar 2013, 04:21 PM Reply Like
  • John Liddil
    , contributor
    Comments (158) | Send Message
     
    This brings up an interesting point the tax bracket of the owner receiving the dividends? In our case we are in the highest bracket and own a large amount of dividend paying stocks. We have decided to take the dividends and reinvest those dollars into our muni's.
    17 Mar 2013, 10:10 AM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » John, I own some muni bond CEF's and I even reinvest those dividends back into the muni funds.
    19 Mar 2013, 09:31 PM Reply Like
  • rnsmth
    , contributor
    Comments (1923) | Send Message
     
    I reinvest all our divvys via broker dripping with Fidelity

     

    It is just easier that way

     

    I like easy
    8 Mar 2013, 09:48 PM Reply Like
  • Nathan Kemalyan MD
    , contributor
    Comments (491) | Send Message
     
    So, this is my first foray into the "instablog" space on SA, and what fun to find a fresh post that reflects all of my own biases!
    Seriously, you have made the case for what I have suspected in my own portfolio for some time. DRIP is a version of dollar-cost averaging, which is a form of discipline; staying invested in the market, knowing that your puchase price will be averaged over a range of highs and lows around the long term moving average of a stock's price. In this case, it's not a monthly periodic contribution, but the dividends that are dollar-cost averaged. You're also right about the effect it has on growing positions in the highest quality, best performing companies in the portfolio.
    The single most illuminating comment I have seen in SA postings came several months back from AgAuMoney, who said "Capital Gains Don't Compound".
    Dividend reinvestment, whether at the single company or at the portfolio level, accesses the compounding power of wealth accumulation. However, unless you're doing it with each company in the portfolio, you're betting that your periodic selection of the "best value" at that time will perform better than the average of your entire investment porfolio. There's no guarantee that the "value" stock you choose will out-perform the best of your existing holdings.
    In one sense, I'm a fence-sitter. Since I don't trust my stock-picking prowess all that much, but new money has to be invested SOMEWHERE, I do my best to make prudent decisions with the new cash contributions and let the collective wisdom of all my previous purchases handle the dividend cash flow. In fact, prior performance of those core holdings tends to reinforce the fact that continuing to make small incremental investments in them is a good idea. There may be a bit of laziness in there as well; The more mature my portfolio becomes, the easier it is to simply let the DRIP function handle a piece of the cash inflow. I don't think any amount of analysis will convince those who are pursuaded that selective reinvestment of dividends is the only prudent way to proceed, but managing a portfolio with new cash contributions partly endorses their position anyway.
    One thing that has helped me with the issue of holding cash in the portfolio has been my venture into cash-covered puts. If you pay close attention to the ex-dividend dates, you can sell "near the money" short-term cash covered puts on companies you'd like to own at a slightly cheaper price. You get a premium payment for delaying your purchase in the company, you may get assigned the shares on a dip in price, and the position closes out in time to make a purchase before the next dividend is paid, with that bit of premium to lower your effective purchase price. You stay fully invested, your objective of buying quality companies at the lowest possible price is served and it enforces the discipline of not purchasing at higher valuations just because you have funds to deploy
    Layered on top of a dividend-growth, long-term hold portfolio building strategy, the put-option strategy keeps your cash reserves at work earning premiums. If you see a great opportunity and can't wait for the put to expire, you purchase your option back and use the cash.
    9 Mar 2013, 11:23 AM Reply Like
  • jwfrazier
    , contributor
    Comments (93) | Send Message
     
    Nathan:

     

    Sorry to reply to such an old post, but I just came across this excellent article. I would say that Capital Gains DO compound. If a stock goes up say 8% per year, that is compounding. Your thoughts?
    12 Jan, 02:10 AM Reply Like
  • Hawk75
    , contributor
    Comments (5) | Send Message
     
    Thanks for a timely informative article Chowder. I just turned on the DRIP feature on my Fidelity account this week.
    9 Mar 2013, 01:34 PM Reply Like
  • OntheRock
    , contributor
    Comments (187) | Send Message
     
    This is a really clear argument for dividend reinvestment, and makes me feel much better about my own investing. I have been reinvesting most all of my dividends since I started investing in 2009, because my holdings are spread over a half dozen different accounts - various IRAs of mine and my husband - and it would be really cumbersome to try to reinvest with so many accounts. Also, am not so confident in my stock picking abilities that I want to be looking to make new investments every quarter, I just stick to the good companies that have performed for me. I have been amazed how many shares I have dripped in just three years.
    9 Mar 2013, 04:49 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Barron's has come out with their number one rated online brokerage article in this week's issue.

     

    I found a way for those of you who don't subscribe to see the article, I hope.

     

    http://on.barrons.com/...
    9 Mar 2013, 08:41 PM Reply Like
  • AgAuMoney
    , contributor
    Comments (4430) | Send Message
     
    The link works for me, but it brings up the 2011 review.

     

    This should be the 2013: http://on.barrons.com/... entitled "Back Online".

     

    Interactive Brokers (aka IB) was #1 again this time. I've been thinking about opening an account with them, but don't really need it. Their margin rates are very appealing...
    9 Mar 2013, 09:33 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Bummer!!! I didn't realize I linked the 2011 article.

     

    If I were trading and using margin, I would use IB. Most of my accounts are with TD Ameritrade, I also have Fidelity. I'm just glad TDA was rated better than Schwab. ... Ha! Why? Because I don't use them. I didn't want to be missing out on something.

     

    Notice how far down the ladder Scottrade is? I wasn't impressed with them when I was researching online brokers. I thought I'd rather pay more for quality, based on what my needs are.
    10 Mar 2013, 09:26 AM Reply Like
  • AgAuMoney
    , contributor
    Comments (4430) | Send Message
     
    '''Notice how far down the ladder Scottrade is?'''

     

    I do like to read the Barron's review every year. They give their rankings in multiple categories, so it is easy to evaluate and decide based on the criteria most important to you, rather than on what the author/editor preferred. For example, their "occasional trader" is 6 stock trades and two option trades per month. I don't average even 2 stock trades every month.

     

    So I find Barron's cost ranking doesn't mean much to me. The kind of trading that is expensive at scottrade is options. I don't do more than maybe 1 or 2 per year. Normal trades are $7, which is competitive. Several of the other categories don't matter to me either. I don't miss having a bigger list of NL and NTF mutual funds, for example. And I might do bonds, if interest rates ever go up, and Scottrade has the ones I'm interested in so a bigger list doesn't matter to me.

     

    The big thing to me, notice where they are in regards to customer service? Not necessarily the top, but they have a local office.

     

    I do a lot of non-standard stuff, from dealing with paper stock certificates, to donations in kind, and etc. The one reason I chose scottrade when I did, is they had a local office. Decent online access was good enough, as were the costs. I have a few more choices in local office brokerages now, even fidelity came to town in the last couple of years. But I can walk to scottrade and back in an easy 10 minutes.

     

    The only other broker within reasonable walking distance is Edward Jones. And that just isn't going to happen.
    10 Mar 2013, 05:01 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » I went with TD Waterhouse for the same reasons you went to Scottrade. When online trading was coming into play, I wanted someone local I could chase down, just in case. They were the first player to set up in our city. Then Ameritrade consumed them. ... Ha!

     

    I was with Fidelity first though. I knew of them due to my Boston roots and I have a brother that was working for them while going to school. I felt safe with Fidelity.

     

    Other firms are here now, but I'm sticking with what I have.

     

    My main concern is having a brokerage that would pass on stock reinvestment discounts, allow for dividend reinvestment and issue fractional shares.
    10 Mar 2013, 06:29 PM Reply Like
  • Happy2Bead
    , contributor
    Comments (91) | Send Message
     
    Chowder, I am learning so much from you. I have gone back and forth in the past at times automatically reinvesting dividends and at other times not reinvesting, in order to accumulate the cash until I have enough for a new position or to put in an undervalued position. Now I feel confident that automatically reinvesting the dividends works for me just fine. I have started printing out your articles and instablogs, highlighting the points I want to refer back to. You are helping me become a better investor. Thank you
    19 Mar 2013, 02:19 AM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Thanks for the kind words Happy.
    19 Mar 2013, 09:31 PM Reply Like
  • scacodcar
    , contributor
    Comments (2) | Send Message
     
    Chowder:
    I am a newbie in SA; loved your post.
    I use your technique in my Vanguard IRA account and try keeping a 10% cash (dry powder) position; another advantage of the DRIP, is that it improves my yield-on-cost and takes the guessing out of the equation.
    On my taxable account (Merril Edge); I have been accumulating the dividends, as part of the 10% cash; some "mental block" about fractional shares and tax hassle and using specific identification method at sale time; but always wondering if this was a mistake; waiting for MCD, PG or KO to get cheaper can get self-defeating.....miss the boat; after reading your article, I think I need to go DRIP in the taxable account too. Thanks.
    1 Apr 2013, 08:11 AM Reply Like
  • Top Notch
    , contributor
    Comments (26) | Send Message
     
    Hi Chowder,

     

    I found your article disturbing. I mean that in a good way. I'm convinced you're more experienced and wiser in this domain than me. Now I either need to change to your strategy or convince myself that mine is not Crazy Thinking.

     

    There are two points that lead me to believe that selective reinvestment is not crazy.

     

    1. Other than portfolio balancing considerations or discount programs, it doesn't seem to me that "already in my portfolio" is the best selection criterion for an investment.

     

    2. A dollar is a dollar whether it came as a dividend or a paycheck. My investment strategy shouldn't depend on the source of the income that I'm investing.

     

    You put forth some very interesting arguments including notions about investing in "undervalued" or "overvalued" stocks, but it seems I could account for these ideas in my stock selection without dripping.

     

    At any rate, thanks for the thought provoking article!
    5 Apr 2013, 05:35 AM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » >>> My investment strategy shouldn't depend on the source of the income that I'm investing. <<<

     

    This is where I have a different view. In my opinion, an asset is only as valuable as the amount of income it produces.

     

    Most people are focused on the capital gains. Capital gains vary a lot more than dividends do. Capital gains are a lot less reliable than dividends are.

     

    Since my number one priority is to build an income stream that is reliable, predictable and increasing. Dividend reinvestment insures that goal is met, regardless of market conditions.

     

    That's a pretty powerful concept!
    5 Apr 2013, 08:28 AM Reply Like
  • jmsims2
    , contributor
    Comments (25) | Send Message
     
    The nice thing about automatically reinvesting dividends is that you don't have to deal with any frictional costs, like trading fees. If I am sweeping dividends into cash, I am not reinvesting for sometimes quite a while for a few reasons. First, it might take awhile to add cash to the portfolio (if my only source or main source is dividends). Second, it may take me awhile for me to get this money reinvested. Not only do I have to build up the cash, but I also have to find something to invest it in. So why not reinvest $100 back into JNJ or whatever I may hold (for free) and get that money compounding immediately. Let the new money carry the weight of building new positions.

     

    I used to collect my dividends in cash and look for undervalued positions....but I found that I just don't have that many good ideas and the money was just sitting there waiting for me to have one. After reading a lot (many of Chowder's comments but also other articles) I determined I was missing out on immediate compounding by not reinvesting.

     

    Note: I don't do this in my other account where I have very little new money going in...I take those dividends in cash and use them to establish new positions...only because I am not actively adding to the account with new money.
    5 Apr 2013, 09:38 AM Reply Like
  • rlp2451
    , contributor
    Comments (4554) | Send Message
     
    Chowder -
    Have you had the chance to look at Scottrade's Flexible Dividend Reinvestment plan yet?
    4 Jun 2013, 09:50 PM Reply Like
  • AgAuMoney
    , contributor
    Comments (4430) | Send Message
     
    It looks like a really interesting idea. If I did not also have accounts at sharebuilder I would be all over it. I have not figured out how or if I am going to use it. I probably will use it in my or my wife's roth's.
    4 Jun 2013, 11:47 PM Reply Like
  • jamesfranklin1
    , contributor
    Comments (3) | Send Message
     
    FDRIP does look interesting - Chowder clued me into it and I just looked it up. It's a cool idea for reinvesting without doing it automatically (which I still think is the better route). I loved my Sharebuilder account - I was putting $300/mo in and investing in 10 stocks for some time. Then I decided to use the cash for a biotech idea (still waiting to see how that plays out) and so stopped the auto. In the meantime, they discontinued! I could have grandfathered, but didn't want to keep paying $12/mo for something i wasn't using. If you have the start-up cash, the Interactive Brokers can be a pretty cheap way to do something similiar, but I still miss that Sharebuilder plan - it was a great idea and no one else is doing it... probably because it isn't profitable (for the company)!
    12 Aug, 03:20 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » No rip, have no need to. I'm set in my ways and not looking to change.
    4 Jun 2013, 10:10 PM Reply Like
  • Angelo A.
    , contributor
    Comments (40) | Send Message
     
    Mr. Chowder,thank you so much for your enlightening articles. I am learning so much from you.
    I'm 31 and starting a project similar in objective to yours.
    I feel confident that automatically reinvesting the dividends works wonders but unfortunately for me, at least in my country, I have to pay to reinvest them, so I have to be extra careful when it comes to find true value in stocks to invest on.
    I 'm trying to go for a "permanent" total return portfolio, with a majority of dividend paying stocks, but including bonds and other investment assets, to pass on to my children and hoping to achieve something around 30 million around 65 and living off dividends by age 45. I'm thinking on going for almost equal weighting in sectors, except for telecoms. Please feel free to give your opinion if you wish, it will be most welcomed. http://bit.ly/11Ba0B6 Hope to keep on following your blog and seekingalpha instablogs.

     

    Kind regards from Portugal!
    9 Jun 2013, 03:21 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Hello Angelo,

     

    If reinvesting the dividends don't work for you, then focus on what does. If I were to suggest anything, it would be to focus on high quality companies. I would avoid speculation for now until you have a well established portfolio of core positions.

     

    My daughter went to school in Saltalamachia, Spain and said she met some nice people from Portugal. I was surprised that as close to Portugal as she was, she didn't make a visit.

     

    Take care of my boy Ronaldo for me. I'm also a Real Madrid fan. ... Ha!
    9 Jun 2013, 04:02 PM Reply Like
  • Angelo A.
    , contributor
    Comments (40) | Send Message
     
    Hello Chowder,
    reinvesting dividends works for me, the problem comes with paying for reinvesting them because we don't have DRIP through Portugal or any broker who does not take its small bite out. That's why determining if a stock is undervalued or fairly valued when the time comes to reinvest the dividend cash is so important every time for me.
    She went to Salamanca in Spain? That is a great university, and they do receive students from all over the world. You better tell her that Lisbon has been in the top 5 cities in the entire world that deserve a visit in 2013, being described as the best hidden gem in Europe :). Despite I'm not a fan of C. Ronaldo (his Ego and bad manners are bigger than is huge talent) he does bring the spotlights to Portugal quite often. But we do have so much more to offer ;).

     

    PS: you should consider becoming a fan of S.L.Benfica (biggest Portuguese club), ahahahah!
    9 Jun 2013, 04:27 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » You know, I don't follow the Portuguese teams as much as the other countries, but I am well aware of Benfica. I'm always wary of them in Champions League. I may just have to sign on with them.

     

    Arsenal in Premier League is my number one team.

     

    I root for AC Milan in Serie A ... Schalke in Bundesliga ... Real Madrid in Spanish Primera ... Celtic in the Scottish League.

     

    I need a Portugese team and I will go with Benfica from here on out. Thanks for the suggestion.

     

    How do you think Portugal will do in the World Cup?

     

    I'm looking for a sleeper team in our betting pool. I won the pool for the last Cup by going with Netherlands. Everyone picks Spain, Germany, etc. I needed a country to advance far enough to separate me from the others and I was the only to pick Netherlands. So I won. I need another sleeper. ... Ha!

     

    I'm going to look at Belgium during the qualifiers and I'll keep an eye on Portugal.
    9 Jun 2013, 04:42 PM Reply Like
  • Angelo A.
    , contributor
    Comments (40) | Send Message
     
    To be honest, I'm a Benfica supporter so that is a huge bias.
    So huge that I must advise you if you want to support a team in Portugal, go for F. C. Porto.http://bit.ly/14MO7wu
    Porto has dominated soccer in Portugal for the past 25 years, has won 2 Champions League cups and 2 UEFA cup in the last 30 years. Its President is the world's soccer club President with most titles.
    And Benfica has lost the 2012 /2013 championship in the last leg, the 2013 UEFA cup final and the 2013 Portuguese cup final all in couple of weeks!!
    http://nyti.ms/11BiS9Q

     

    So, being honest and rational, go for F.C.Porto! (We have a saying in Portugal that you can change wife, religion and house but never your club, so a soccer supporter will always be faithful to his club).

     

    As for Portugal, I'm not so confident that we will even get to the world cup. We are far behind Russia in our qualifying group, so probably we will have to go for play-offs. After that it's pure luck. But if we go to the world cup i don't think we will go anywhere. We've lost quite a few important key players in the last 5 years and Ronaldo is the only one that is a world class player nowadays. And 1 guy can't make a difference in a world cup (except for Maradona). I would put my money in Netherlands (great players and world class rookies), Spain (barcelona type of play), Belgium (can be along with an african team, the tournament's joker) and Brazil due to the fact that they are playing home and their coach is an expert in motivating players.
    9 Jun 2013, 05:10 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » I can't root for Porto. That would make me a band wagon person, which is why I am an Arsenal fan and not a Manchester United fan.

     

    Spain is getting old. They may wear down in competition. Netherlands now suffers from the same disease that England suffers from. EGO. Nobody wants to play a role anymore. Everyone wants to be top dog. I need a team that will work together.

     

    Brasil is on the front burner. With the fans behind them, they might pull it off. I have them near the top of my list.

     

    I will be going with Germany to win it all, but so will my buddies. So, I'll need a sleeper. I'm not counting out Belgium. People will overlook them and they have some experienced players. I'll have to keep an eye on them, see how well they play together.

     

    I don't know who to look at in Africa. Maybe Ivory Coast? Is Drogba even playing? ... Ha!

     

    Thanks for the idea, I'll have to research it.
    9 Jun 2013, 06:25 PM Reply Like
  • rnsmth
    , contributor
    Comments (1923) | Send Message
     
    Viva Brasil :)
    9 Jun 2013, 05:41 PM Reply Like
  • Golferdood
    , contributor
    Comments (766) | Send Message
     
    Really good article Chowder, lots of things to think about.

     

    I have always reinvested every dividend I ever received, mainly because I think I have invested in the right companies in the first place. I take a lot of the guesswork out of it by sticking with the best of the best dividend payers like MO, JNJ, PG and such. I also hold larger positions in those stocks and do not worry much about single company events taking them down to the point the dividend is affected. Of course anything can happen but I feel like if you saw PG or JNJ go belly up, everything else would already be long gone.

     

    One thing I could never get it through my head why I should want less money in the best stocks. You can't let the size of your positions get way out of control, but they got that way because they performed well, and might continue to do so. If there's no fundamental reason to sell I don't. Oh I have and can hardly think of an instance where I don't wish I still owned the stock.
    9 Jun 2013, 06:52 PM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Golferdood, I agree. I see it over and over again where people say I wish I owned more of a quality company, take your pick.

     

    Quality is quality. I don't get cute and look for a less tasty fish in the sea. I want to own the best of the best and sometimes that means you don't get to buy at discount.

     

    I say so?
    9 Jun 2013, 08:35 PM Reply Like
  • Golferdood
    , contributor
    Comments (766) | Send Message
     
    Yup, in almost anything the good stuff costs a little more. I never owned KO in my whole life because it was always too expensive and I wouldn't pay up. Seemed smart at the time but 10-20 years later (which is really just the blink of an eye), trying to save a buck or two kept me out of a great stock.
    9 Jun 2013, 09:15 PM Reply Like
  • KenN513
    , contributor
    Comment (1) | Send Message
     
    I don't know if it's too late to post on such an excellent blog post but I'm confused. I looked at MMR in the time range that you are talking about here. This company split 2:1 in October 2012 AND increased dividend payouts. You stated that Dividend growth "organically" was 9%. True if the dividend is paid only on the original number of stocks. But, since the payout was on twice as many shares, the Dividend growth was much, much more.

     

    Let's see, March '13 payout .5 or about $2.00 annually X 2shares = $4.00. 2 1/2 years earlier about $.35 or about 1.4 annually. Doesn't this equate to a 52% CAGR? In other words account for ALL of the dividend growth for this stock?

     

    I don't know. I may be confused about how to properly calculate the CAGR ((D2/D1)^(1/n)). Or I may be confused about how to read the historical prices at Yahoo. Both have been known to happen. Further, this question will cause me to re-think how I examine what has been come to be known as the "Chowder Number"

     

    Thanks, Ken
    19 Apr, 03:30 AM Reply Like
  • chowder
    , contributor
    Comments (7299) | Send Message
     
    Author’s reply » Hello Ken,

     

    I'm assuming you are talking about MMP, not MMR.

     

    When you have a stock split, you also have a dividend split. In other words, if you own 100 shares of something paying a dividend of $1.00 and they split 2 for 1, you now have 200 shares with a dividend of 50 cents.
    19 Apr, 08:15 AM Reply Like
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