12-01-2013, 06:41 PM
I think I am homing in on a clearer mental framework for this debate, based largely on my thinking about “new” versus “reinvested” money. While I think that manual reinvestment is likely the “right” answer, there is plenty of room and reason for automatic reinvestment.
Once I concluded that I must think about all investable money in the same way (whether from my paycheck or from dividends) and that hence purchases with new money are no different from purchases with dividends, it is easy to see that manual deployment of dividends is the “right” approach. I should want to put my money to its most productive use at any given time, and it does not matter whether I procured that money through my labor or through dividends. So I should take whatever money is at my disposal at this moment and buy my highest-conviction, best-value dividend growth stock at the moment. This means manual reinvestment of dividends.
However, there are some sound reasons that fully manual reinvestment of dividends is not practical or desirable. There are limits to my time and knowledge, and I believe that in some cases it is wise to remove myself from the decision-making. There are some core dividend growth stocks that I want to build a large position in over time. These are stocks that I believe will continue to grow earnings and dividends for many years to come. I am comfortable and happy to decide right now that I’d like to buy more PM each quarter regardless of the price, because I believe that the price will continue to rise over the years as earnings and dividends improve. Moreover, I’m not sure that I trust future me to make the same buys with new money. Like most people, I have psychological weaknesses that may stop me from buying PM when it gets to $100, because I was accustomed to buying it for $85.
So here is the compromise I am headed toward: I will automatically reinvest dividends in what I believe are the best, core dividend growth stocks, like PM, JNJ, PG, KO, MCD, and the such. For non-core DG stocks and other outliers in my portfolio (such as the REITs), like FTR, NLY, ARCP, F, and the such, I will accumulate the dividends in my account along with new money, and will invest in the best values I can find at the time. That may be nothing at all, more of my core stocks (when they hit value territory), or other dividend growth stocks that I do not own yet. I haven’t decided which bucket tech or cyclicals belong in, but I am comfortable doing it case by case.
Once I concluded that I must think about all investable money in the same way (whether from my paycheck or from dividends) and that hence purchases with new money are no different from purchases with dividends, it is easy to see that manual deployment of dividends is the “right” approach. I should want to put my money to its most productive use at any given time, and it does not matter whether I procured that money through my labor or through dividends. So I should take whatever money is at my disposal at this moment and buy my highest-conviction, best-value dividend growth stock at the moment. This means manual reinvestment of dividends.
However, there are some sound reasons that fully manual reinvestment of dividends is not practical or desirable. There are limits to my time and knowledge, and I believe that in some cases it is wise to remove myself from the decision-making. There are some core dividend growth stocks that I want to build a large position in over time. These are stocks that I believe will continue to grow earnings and dividends for many years to come. I am comfortable and happy to decide right now that I’d like to buy more PM each quarter regardless of the price, because I believe that the price will continue to rise over the years as earnings and dividends improve. Moreover, I’m not sure that I trust future me to make the same buys with new money. Like most people, I have psychological weaknesses that may stop me from buying PM when it gets to $100, because I was accustomed to buying it for $85.
So here is the compromise I am headed toward: I will automatically reinvest dividends in what I believe are the best, core dividend growth stocks, like PM, JNJ, PG, KO, MCD, and the such. For non-core DG stocks and other outliers in my portfolio (such as the REITs), like FTR, NLY, ARCP, F, and the such, I will accumulate the dividends in my account along with new money, and will invest in the best values I can find at the time. That may be nothing at all, more of my core stocks (when they hit value territory), or other dividend growth stocks that I do not own yet. I haven’t decided which bucket tech or cyclicals belong in, but I am comfortable doing it case by case.