Switching to Drips

For the last two years I’ve been dripping only stocks in my Roth IRA. In the taxable brokerage account I’ve been taking them as cash and combining them with fresh capital every few months to make a separate stock purchase or use it towards paying off my credit card bill by buying stock through Loyal3.

Well that changed a few days ago as I’ve decided to start dripping all my dividends in both my Roth and taxable brokerage accounts. Due to the service being unavailable, dividends received from Loyal3 will continue to be selectively reinvested.

So why the change?

First off, I haven’t been making as many regular large purchases as I originally planned on doing so, meaning it sometimes goes several months between even touching my taxable account. Since I prefer to keep my commission costs less than .5%, I like to save up around $1400 before I buy more stock. By automating how I handle dividends and choosing to drip all of them, this puts the capital to work instantly, buying more shares which in turn will produce more dividends. Nice way to keep growing the account even when fresh capital for purchases is limited.

Second, I’ve been reading a lot of articles and blog posts recently that show just how much of a stark difference there is in total returns when you take dividends as cash vs. reinvesting them in the stock. Dividend growth is also accelerated a lot as well. Granted, I’ve always reinvested dividends by doing so selectively but it usually took a long time to do so. Looking through my Roth IRA transactions I can see that when I initially bought 15 shares of Realty Income I was earning $2.73 a month in dividends. Now, fast forward to today, I am earning $2.86 per month. There has been a few small dividend increases (less than 1 cent) from Realty since then. Everything else has been the result of dripping. Now that’s a small increase on a pretty small position in that account. Not a big deal, right?

Now imagine if I had done this with the 109 shares of O I have in my taxable account. The $19.92 I am currently earning each month in that account could buy almost another 1/2 share per month. Over the course of the year, that is almost 6 additional shares that I didn’t have before.

But what about valuation?

Looking through the stocks in my portfolio there isn’t a single one that is so overvalued that I wouldn’t consider buying more shares out right, if those were my only investing choices. With a long-term investing timeline, I’m comfortable overpaying a bit for shares in quality companies like those in my portfolio since there is plenty of time for earnings to increase and “grow into the valuation.” Besides paying up for at most, half a share in a company per month isn’t that big of a deal. It just allows the compounding snowball to grow that much quicker.

Simplifying Things

Dripping dividends and automating that part of your investing activity also makes it much simpler. No more transferring money around to take dividends from one account to use in another account toward a purchase. Just let everything run on autopilot and add more stock through fresh capital when it’s available. It also takes away the temptation to spend those dividends as you can’t spend money you don’t have.

Going Forward

Like most things, I imagine my thoughts on this topic will change as the years go by. That’s all right and what makes this fun. Can’t just do the same thing all the time, right? Gotta mix it up every once in a while and try new ways of doing things. I could see myself switching back to selectively reinvesting dividends, combining them with fresh capital each month to make a purchase once (1) I have the income necessary to make a normal sized purchase each month and (2) once my account is producing a significant amount of dividends. An extra 50 bucks or so doesn’t really help me out getting the required amount to invest each month. Once that figure climbs to be several hundred, maybe I’ll rethink this strategy.

 

Disclosure: I am long O. Please see my portfolio page for a complete list of my holdings.

So what are your opinions on the subject of dripping vs. selectively reinvesting? Or do you not reinvest dividends and simply use them to supplement your current income? Sound off in the comments and let me know what you think! 🙂

31 comments

  1. Good call on starting to drip, SFZ. It may seem slow at first – but once you get the ball rolling, those drips will add up and compound over time. Considering that your investment horizon is long, its a good move to employ.

    Best wishes
    R2R

    1. Thanks for the input R2R. I really like it mainly just for simplifying everything. Just buy quality stocks, check that reinvest dividends box, and have it automated to compound over the long term.

      Best wishes,
      SFZ

  2. Good stuff dude!
    I’ve been dripping all my stocks since I’ve started DGI. As R2R said its slow in the process but the drips do add up. When you DRIP with your broker are you able to purchase fractional shares? Unfortunately my broker doesn’t give me the option to buy fractional shares with their synthetic DRIP plan. Also one point that I think you forgot to add is that when you DRIP with certain companies they sometimes give you a discount (~3%) of the stock price when you purchase them with dividends! For example: H&R REIT and Riocan offer a discount on their shares for reinvesting their dividends. pretty sweet incentive I must say! However you’ll need to check with your broker to see if they honor the discount. I use to do my investing through BMO investor line but after phoning and checking to see if they honor the drip discount I was quite disappointed, needless to say I no longer trade with BMO investor line. haha

    Take care!

    1. Hey Ace, thanks for stopping by man! My broker does allow me to buy fractional shares with drips which is great because none of my positions are large enough to be producing full shares by reinvesting dividends yet. Unfortunately none of the stocks I invest in offer discount plans and honestly I’m not sure if my broker would offer that if they did. I think I’d have to set up an actual DRIP through a transfer agent like Computershare.

  3. I haven’t considered DRIPing yet, but maybe I should since capital is so split up between two difference ROTH’s and now going into a Loyal3 account as well.

    1. Having my stocks split up between accounts is one of the reasons why I made the switch. Just easier to have everything reinvest instead of moving funds between accounts to manually reinvest dividends since I alternate between investing with my main taxable account and then using only Loyal3 for months at a time.

      Thanks for stopping by and commenting.
      -SFZ

  4. i never understood why you wouldn’t do DRIPs on anything possible. Here in the UK, it’s not that easy to find a system that will give you fractional shares from reinvesting dividends, only fractional ownership of funds. Also, how expensive is your broker per trade?! Aren’t there companies there that do <$5 trades (TradeKing, OptionsHouse)?

    1. Based on what I had read and researched up until recently, I thought it was a better idea to selectively reinvest dividends so I could have more control over how my money was invested. Plus I figured doing that way allowed me to always put money into the best valued stock at the time, instead of potentially dripping a stock that was overvalued. But I’ve since changed my mind about it and I’m starting now.

      With my broker I’m able to get fractional shares so that’s not an issue. I currently pay $8.95 a trade which will lower to $5.95 relatively soon once my assets reach a certain monetary value. I know I could get a better deal elsewhere and I may open another account with a different broker, but for now like having all of my financial accounts (savings/checking/credit card/Roth/brokerage) with one institution except for Loyal3. Very convenient to be able to move money around instantly. Diversifying across multiple brokers is something I plan on doing in the future, just haven’t gotten around to it yet.

      Thanks for stopping by and commenting M.
      Best wishes,
      SFZ

  5. I think as long as you’re in the accumulation phase the key is to just get the dividends reinvested whether that’s drip or adding to other cash. Portfolio size does play a part though especially if you’re overweight a high yield stock. I recently turned off the automatic reinvestment for all of my positions because the dividends are substantial and I have enough savings to make purchases every month anyway. Given the complexity of multiple accounts and having to transfer dividends around I think that you made the right decision.

      1. I hear ya, even though its only been a 1 cent raise a month, it’s still pretty cool to see something compound like that with no extra work on my part.

    1. Absolutely JC, regardless of which strategy you choose, just reinvesting them somehow is definitely more important. While my O position is a bit oversized right now in comparison to my other holdings, I’m not too concerned about it. Working with a 20 year plan, I’m sure my normal ending position size will be larger than that at some point so I might as well just let it compound.

      Yeah I think I made the right decision to just simplify everything. Just means I can spend more time doing stock research and catching up on blogging. 😉

      Best wishes,
      SFZ

  6. SFZ,
    Dripping and dollar cost averaging can be an excellent strategy if you are consistent and persistent and you choose great companies. I’ve owned CVX and KO for more than 15 years each, and always reinvested the dividend (I wrote about both on my blog if you’re interested in the specific data). Also EMR for 10+years. Stick with it, choose blue chip dividend growers, and watch your money compound!
    -RBD

    1. RBD,
      That’s the plan, stick with quality stocks and just let everything snowball. I checked out those posts on your site. Impressive stories. Getting that share of Chevron was an awesome gift to get you started with investing.
      Thanks for stopping by and commenting.

      Best wishes,
      SFZ

  7. Greetings SFZ,
    I am new to dividend investing and was curious about how the cost basis for the dripping is determined. Will you be figuring that on your own or is it a service that is provided from your brokerage? Thanks for any help with this you may provide.
    Cool blog,
    Dividend Dream

  8. Hey SFZ,
    I currently use the cash to reinvest into new stocks. But I think dripping has it’s advantages like you have mentioned in your article. I like the idea of investing into cheaper stocks with the dividends. I try not to hold the dividends in cash for too long. I’m sure there are pros and cons to both methods. Thanks for sharing!

    1. Hey DM, thanks for stopping by. You’re right, there are pros and cons to both ways of doing things and ultimately comes to down to individual preference. The important part is that they are reinvested and allowed to compound.

      Best wishes,
      SFZ

  9. Nice move there SFZ!

    An increase is an increase, no matter the amount. I’ll take it anytime. It will be my strategy too once I had build up my portfolio in term of number of businesses. I’m looking to hold between 10 to 15 before I switch to DRIP.

    1. Thanks David! Interesting strategy about building up your portfolio first, look forward to reading about it on your site.

      Thanks for stopping by.

      Best wishes,
      SFZ

  10. From day one I always reinvested every one of my dividend distributions. I know some people say it’s not the best thing to do as you might be “overpaying” for a stock when a distribution is given at a time when a stock is considered expensive. But, this does automate the process for you and it is free to do and anytime you can take the “human” out of an equation is a good thing. Too much thinking and analyzing may lead to some stock sales you later regret. Auto pilot for reinvestment, it’s a good thing.

    1. I completely agree Keith. One of the reasons why I was hesitant to just automate everything was because I like to have complete control over my investing. I guess I’m kind of a control freak. 😉 But I realize that dripping will just make everything easier and plus there are much worse things than buying a blue chip dividend growth stock that may be considered a little expensive, especially at small amounts.

      Best wishes,
      SFZ

  11. SFZ,
    My wife and I decided to start using DRIPs about six months ago. It has already added $202 to our annual dividend income. Imagine doing that for 10 years?
    Good luck!
    KeithX

    1. Wow, that’s awesome! Just shows what the power of compound interest will do, given enough time.

      Thanks for stopping by and commenting.

      Best wishes,
      SFZ

  12. Hi there!

    I don’t like automatically buying small amounts of shares from dividend income. I prefer to reinvest dividends in stocks that trade at a discount to fair value. Scottrade has an interesting alternative to DRIPs, called FRIPs. The F is for flexible. Dividends are collected into a separate pool, and you can specify how frequently and in which stocks the money should be reinvested. I do it quarterly.

    BTW, I recently expanded my blogroll to a full page and added your site. Check it out:
    http://divgro.blogspot.com/p/blogroll.html

    Cheers
    FerdiS

    1. Hey FerdiS,

      First off thanks for adding me to your blog roll, really appreciate the support!

      I thought the same way as you up until fairly recently regarding dividend reinvestment. It just makes things simpler for me in the end, since I sometimes go months at a time without buying anything in my main brokerage accounts, choosing instead to buy small amounts through Loyal3. Transferring money around just got to be too much of a hassle. There’s pros and cons to each method.

      I’ve heard of Scottrade’s FRIP. It’s something I need to look into further. At some point I’d like to diversify into another broker and may check out Scotttrade. It sounds like a pretty good set-up.

      Best wishes,
      SFZ

  13. SFZ,

    Good post. I really like the idea of Dripping into blue chip securities and that takes the emotions out of investing. I’ve been already doing it about 3 yrs. However, I also like the idea of having flexibility to buy securities whenever they become fairly valued. That’s why, I keep 4 Portfolios and track them on my blog as an open book, which btw, employs different strategies as well.

    Best wishes.
    PIM

    1. Thanks for stopping by PIM! Keeping everything simple and taking the emotion out of it is a good reason to use DRIP’s. I’d prefer to only buy stocks that are fairly valued as well, but I figure with the relatively small amount of dividends I receive each month, buying some “overpriced” fractional shares isn’t that bad. 😉

      Best wishes,
      SFZ

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