03-29-2014, 06:58 PM
(03-29-2014, 03:29 PM)DRILLINDK Wrote: The gentleman at Dividend Mantra wrote a great educational peice about different strategies and philosophies of dividend growth investing. If you haven't read it yet, I encourage you to check it out:
http://www.dividendmantra.com/2014/03/se...t-vs-drip/
Anyway, it really got my gears turning as I'm in the process of establishing a dividend portfolio. I would appreciate your suggestions and recommendations.
What do you do with your dividends you receive? Do you DRIP or do you take the cash and allocate it towards new/existing positions...and why?
Are there tax implications if you automatically reinvest the dividend income in the company or DRIP? I'm aware you would pay taxes on any dividend you draw on from your account, however if you elect to receive the cash dividend and reallocate to another stock do you pay taxes on the dividend income?
I've read that a big negative to DGI is cost basis tracking for tax purposes. Is this really a big deal anymore since online brokers have become so popular. Don't they automatically keep track and record this for you?
I'm sure more questions will come up, but this are the big unknowns I have so far about DGI. I would appreciate any incite you can offer.
Hey Rick!
These are great questions that all new dividend growth investors need to get a handle on. My recommendation about whether to reinvest dividends back into the companies that paid them or collect them and put them into new stocks depends on the size of the portfolio and the experience of the investor. If you portfolio is small and you are relatively new to the game, I think that automatically reinvesting dividends back into the stocks that pay them is a no-brainer. This is for a couple of big reasons: First, the dividends you receive are likely to be very small for a while, and definitely too small to be useful in establishing a whole new position. (Related to this, reinvesting will help keep transaction costs down.) Second, the first ten or so stocks that you buy should be "core" holdings that you are comfortable buying at fair prices, so reinvesting dividends in these companies does not present a conundrum about continuing to accumulate.
When your portfolio gets big (you have a lot of positions) and is throwing off sizable dividends, then I think collecting the dividends to allocate manually becomes very compelling. Your portfolio is mature and new purchases will serve more specific and niche purposes, and the transaction costs are no longer a worry. Plus, you've garnered a lot of experience by then to make the right moves with the dividend money.
For perspective, I am receiving (on average) a little over $700 per month in dividends now and have positions in 24 different stocks. I still reinvest dividends back into the companies that pay them in almost every case.
As to the tax implications, Be Here Now is correct. What you do with the dividends does not affect tax status. If you are trading in a taxable account, you'll be taxed on the dividends whether you reinvest them automatically or collect them to invest manually. If you can start in a tax advantaged account, that is preferable. I think most brokerages make cost basis pretty painless now.
Keep those questions coming -- best of luck!