11-26-2013, 06:14 PM
I’ve been thinking a lot about the automatic versus manual reinvestment issue, and my thinking on the subject has been moving fast. So I wanted to post some thoughts and get other opinions.
I’ve always treated new money (fresh money going into my brokerage account from my paycheck) and reinvested money (dividends!) differently. In the master spreadsheet for my dividend growth portfolio, I list the purchases I’ve made since starting the portfolio.
For example, 5 times over the years, I bought 50 shares of JNJ with new money – a total of 250 shares with out-of-pocket money. Each of those transactions is listed in the “purchases” area of my spreadsheet. In another part of the spreadsheet, I track how many shares of JNJ I own now. Reinvesting JNJ dividends bought me another 22 shares over the years. So I now own 272 shares of JNJ. I have not tracked the separate purchase of those additional 22 shares (dates, prices, etc.), however, because it was not “new” money. That was dividend reinvestment, and so I’ve thought about those 22 “extra” shares as part of the “return” on the initial outlay of money for the original 250 shares.
I am starting to think that this may be a very poor conceptual framework, however. When JNJ pays me a dividend, it is just as much “my money” as the money I earn in my paycheck. And reinvesting that money back into more JNJ shares is just as much a purchase decision as when using “new” money. The only difference is that in one case – the dividends – I decided in advance that the dividend would be used to buy more shares of JNJ, regardless of the share price at that moment.
This is a hard realization for me, because it implicates my concept of “returns” on my dividend growth stocks. Until now, I’ve been looking at it this way (using made-up numbers):
I bought 250 shares of JNJ for $15,000. Those initial 250 shares are now worth $20,000, for a return of 33% – just on the shares I initially purchased. With reinvestment, I’ve got 272 shares worth $22,000, for a return of over 45%.
But this is nonsense, I am now thinking. Those “extra” 22 shares were not “extra” at all. They were purchase decisions with “my money” just as much as the original 250 shares, and I should track and think about them in exactly the same way. And it will change the apparent returns. This will require a mental and spreadsheet overhaul. I am not excited about tracking every single dividend payout and reinvestment, but I think I may have to go down that road if I really want an accurate picture.
Thoughts appreciated!
I’ve always treated new money (fresh money going into my brokerage account from my paycheck) and reinvested money (dividends!) differently. In the master spreadsheet for my dividend growth portfolio, I list the purchases I’ve made since starting the portfolio.
For example, 5 times over the years, I bought 50 shares of JNJ with new money – a total of 250 shares with out-of-pocket money. Each of those transactions is listed in the “purchases” area of my spreadsheet. In another part of the spreadsheet, I track how many shares of JNJ I own now. Reinvesting JNJ dividends bought me another 22 shares over the years. So I now own 272 shares of JNJ. I have not tracked the separate purchase of those additional 22 shares (dates, prices, etc.), however, because it was not “new” money. That was dividend reinvestment, and so I’ve thought about those 22 “extra” shares as part of the “return” on the initial outlay of money for the original 250 shares.
I am starting to think that this may be a very poor conceptual framework, however. When JNJ pays me a dividend, it is just as much “my money” as the money I earn in my paycheck. And reinvesting that money back into more JNJ shares is just as much a purchase decision as when using “new” money. The only difference is that in one case – the dividends – I decided in advance that the dividend would be used to buy more shares of JNJ, regardless of the share price at that moment.
This is a hard realization for me, because it implicates my concept of “returns” on my dividend growth stocks. Until now, I’ve been looking at it this way (using made-up numbers):
I bought 250 shares of JNJ for $15,000. Those initial 250 shares are now worth $20,000, for a return of 33% – just on the shares I initially purchased. With reinvestment, I’ve got 272 shares worth $22,000, for a return of over 45%.
But this is nonsense, I am now thinking. Those “extra” 22 shares were not “extra” at all. They were purchase decisions with “my money” just as much as the original 250 shares, and I should track and think about them in exactly the same way. And it will change the apparent returns. This will require a mental and spreadsheet overhaul. I am not excited about tracking every single dividend payout and reinvestment, but I think I may have to go down that road if I really want an accurate picture.
Thoughts appreciated!