02-26-2014, 09:16 AM
To me, automatically reinvesting dividends represents a counter productive approach. Very few individuals would take fresh savings and have it allocated to simply reinvest at an arbitrary time and simply distributed between existing holdings. Rather, the person would usually scan the market, looking for the best possible home for that cash.
Why are dividends any different? They are fresh cash hitting the pot. Why not let them accumulate until the reach a decent size to deploy, perhaps a couple thousand dollars, and then look for the best possible home for them? People tend to look at dividends somehow differently from cash out of pocket. [Oh, I can drip this 'free money' as it represents no risk to me.] If when putting $2000 of fresh cash in the account, the investor would not buy new shares of MCD on a giving day, then it makes little sense to drip the dividends on that same day.
My approach is to accumulate cash, try to be patient, and then deploy to the very best location when opportunity arises. Buffet says to let the price come to the investor, rather than chasing price or buying at random. Drip represents just the opposite approach to this idea, as it represents arbitrarily buying no matter what the price or the value on the day of the purchase. I would only consider drip for those companies which give a 5% or better discount for participation. In those, the purchases at least represent a value to the market price.
Why are dividends any different? They are fresh cash hitting the pot. Why not let them accumulate until the reach a decent size to deploy, perhaps a couple thousand dollars, and then look for the best possible home for them? People tend to look at dividends somehow differently from cash out of pocket. [Oh, I can drip this 'free money' as it represents no risk to me.] If when putting $2000 of fresh cash in the account, the investor would not buy new shares of MCD on a giving day, then it makes little sense to drip the dividends on that same day.
My approach is to accumulate cash, try to be patient, and then deploy to the very best location when opportunity arises. Buffet says to let the price come to the investor, rather than chasing price or buying at random. Drip represents just the opposite approach to this idea, as it represents arbitrarily buying no matter what the price or the value on the day of the purchase. I would only consider drip for those companies which give a 5% or better discount for participation. In those, the purchases at least represent a value to the market price.
Alex