Automatic vs Manual Dividend Reinvestment

[The Dividend Guy]

I gather all my dividend payouts into an index ETF until I have enough cash to buy another dividend stock or increase a position.

I don't like seeing cash sitting in my account and generating nothing so I rather have it 100% invested in the stock market in the meantime.

[ChadR]

I automatically reinvest the dividends for most of my holdings. Since I plan on keeping the holdings long term, I enjoy getting even more shares of these companies. When holdings get extremely over valued, I will turn off the reinvestment for that holding. While I might slightly overpay for some of the reinvestments, in 20 years it won't matter. Besides, I enjoy seeing the next quarter's dividend being higher than this past dividend. Quarterly raises.

[Kerim]

(09-08-2013, 09:24 PM)ChadR Wrote: I automatically reinvest the dividends for most of my holdings. Since I plan on keeping the holdings long term, I enjoy getting even more shares of these companies. When holdings get extremely over valued, I will turn off the reinvestment for that holding. While I might slightly overpay for some of the reinvestments, in 20 years it won't matter. Besides, I enjoy seeing the next quarter's dividend being higher than this past dividend. Quarterly raises.

Right right right!

[Kerim]

As I've mentioned before, I've automatically reinvested all dividends so far. For the first time I am reconsidering that approach with respect to the tech stocks that I own: INTC and AAPL. I've recently pared down my INTC holdings a bit, in response to poor earnings growth and fear that the dividend streak is in jeopardy, and as I just posted in the AAPL thread, I don't think I'll ever understand the price action and valuation of that stock, even though I think it will be a reliable dividend grower for many years to come.

So given those things, and given that the tech space is not something you can count on decades down the road in the same manner that you can with, say, consumer staples or something like JNJ, I'm thinking that I may start taking those INTC and AAPL dividends in cash from now on and redeploying the funds in whatever else I am buying at the time along with new money that I put into my dividend growth portfolio.

Not a done decision yet, but getting there. Any thoughts appreciated.

[Ok Red]

Dividend reinvestment is an interesting topic. I think if I was overweight in a position or sector then I would think about stopping dividend reinvestment to allow the position to drift back to an acceptable weighting. For a position that is uncertain (such as Apple or Intel), I think I would either stay the course and reinvest OR get out of the position. If it's not good enough to reinvest, then is it good enough to hold?

Unfortunately, the Tech landscape is littered with past device makers that didn't pan out - Palm, Blackberry etc. For that very reason Apple makes me a bit nervous. Intel - who makes computer guts - not so much.

[Horace Cugle]

I'll throw in my 2 cents. I always reinvest; one less thing for me to screw up trying to get cute with things. I also have a huge dislike of moving small amounts of money around and paying commission on it.

Honestly though, the biggest reason I reinvest is that I already think I own the right stocks for the long run and I want to keep pouring money into their success not taking it out.

[TomK]

It is a silly consideration, but I don't like the fractional shares that you accumulate as a result of automatic reinvestment. Maybe I'm too much of a neat freak. This hasn't stopped me from reinvesting automatically, but sometimes I wish I had never done any automatic reinvesting, and my portfolio would be nothing but nice round numbers.

You make a good point about commissions, Horace, but I think the idea would be to pool the dividends with new money such that you are still only making purchases of sensible size.

Certainly, if you would keep buying a particular company with new money, no reason not to reinvest automatically.

[cannew]

Automatically re-invest mainly because I don't wish to pay commission to purchase small amounts (under $3,000).

When larger amounts are to be invested look to buy when the stocks I follow are value priced, else I'll wait.

[Kerim]

Over in another thread, Alex made this point:

(10-09-2013, 07:53 AM)hendi_alex Wrote: I also have an issue with dividend reinvestment, unless the shares are bought at a significant discount. It makes no sense to me for a person to opt for dividend reinvestment because those accumulations would rarely come on a day that, if holding investment cash, you would have decided to buy shares of that particular company. So if you would not put fresh cash into shares on that day, why have buy them with dividend cash. IMO it is much better to let the dividends accumulate, and then make a well considered investment with the money. If the reinvestment shares come at a 5% discount, then perhaps that would tip the scale toward direct investing with the dividends.

I think I am starting to come around on this. As I said earlier, I mostly reinvest automatically at the moment. And I’ve thought of one new wrinkle supporting automatic reinvestment, which is that I find it hard psychologically to put new money in a stock at prices above my average cost per share, thus “averaging up” my price. But if I have chosen a winner and still believe in it, I should have no hesitation to do so. Automatic reinvestment of dividends is a way to accomplish this.

On the other hand, I think Alex makes a pretty good point. The dividend payment date is completely arbitrary. If I am hot for PSX right now and just neutral on JNJ, why would I sit idly by and let my JNJ dividend buy more JNJ shares today? I wonder if there is some psychology at play here, where I tend to think of the JNJ dividend as “JNJ money” that is appropriately used for more JNJ shares. Really, though, the moment they pay the dividend, it is just “Kerim’s money” and I should put it to the best use at the moment.

Perhaps one of the biggest advantages that automatic reinvestment has going for it is that your money stays invested and you do not miss out on gains (and more dividends!) while dithering around with a bunch of cash on the sidelines. However I am comfortable enough with this style of investing now that I am not worried about this at all. I find I am usually pretty eager to pick up a few shares of something or other.

I do still feel like there is a logistical problem in that my dividend growth portfolio is spread among different accounts (taxable, rollover, roth, etc.), which makes the manual reinvestment approach a little less simple and appealing. But there is no reason I couldn’t do a hybrid of some kind. As usual, no decisions made as yet, but I’ll keep you posted.

Feedback appreciated.

[Shawnjeffrey]

I feel that the FRIP plan that Scottrade offers really is the best of both worlds. I can use the dividends towards any stock I prefer at that moment--and still save on the commission. Being that I'm at the stage where my dividends are south of 1000 annually, being able to choose my stock without paying that extra 7 fee is pretty significant for me.

[hendi_alex]

That kind of flexibility sounds great to me!

[Kerim]

I just spent a little bit of time looking over my portfolio, and am inching closer to taking a few names off of automatic reinvestment. As I said in an earlier post, I am starting to come around to the logic of manual reinvestment, but as with most things, I am a slow mover. I am thinking it would make sense to stop automatically reinvesting on my higher-yielding names -- ones that I bought specifically to juice payouts, including REITs NLY and ARCP, and telecom FTR. I don't feel strongly enough about those to allocate new money to them, so perhaps it makes sense that I should use their hefty dividends to fund purchases of more core DG stocks. Then there is INTC. I've been strongly considering selling off more of my Intel holdings, so why on earth would I be buying more through automatic reinvestment? My only hesitation there is that my INTC is in a taxable account, and if I stop automatic reinvestment, I'll have to pay taxes on those dividends, right?

Any thoughts?

Thanks!