Selective Dividend Reinvesting vs DRIP

[DRILLINDK]

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.


Cheers
~Rick

[Be Here Now]

(03-29-2014, 03:29 PM)DRILLINDK Wrote: 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?

The tax status of your dividend is not affected by what you do with it.

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(03-29-2014, 03:29 PM)DRILLINDK Wrote: 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?

My broker tracks cost basis.

[Kerim]

(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!

[Dexter]

DRIP means you can dollar cost average with small amounts of money with little to no commissions.

Buying it outright through a broker means you have to,
1) Spend more money, otherwise the commissions take a big cut. $7 on $700 is 1%.
2) Pay a higher commission for the initial purchase.
3) Pay that same high commission if you want to add to the position.


It's a no brainer in my opinion, but not everyone agrees.

I guess if I had a bigger portfolio I might feel differently, but I'm not comfortable paying any commissions usually and I prefer to buy small and buy often.

If I really want something and there is no DRIP program I will pay commissions, otherwise DRIP.

I think the best advice is, find what works for you. What let's you hold onto your positions and sleep comfortably at night? Whatever that is, you should do it

[DRILLINDK]

Thanks for the replies and all the great advice! I'm planning on establishing my DGI account with Merril Edge. They offer 30 free trades a month with what appears to be no catches as long as you meet the account requirements.

http://www.merrilledge.com/zero-dollar-t...arjyxksa_s

I think building a select core group of stocks is great advice. I plan on doing just that very soon.

So, are there any other tax nightmares I should take into consideration when DGI? If my broker tracks my cost basis, then I really don't want/need to track anything?

[Kerim]

(03-30-2014, 10:51 AM)DRILLINDK Wrote: So, are there any other tax nightmares I should take into consideration when DGI? If my broker tracks my cost basis, then I really don't want/need to track anything?

That's right. Generally, if you are in a tax-deferred account, there is really nothing to do. If you are in a taxable account, you'll get a 1099 at the end of the year that spells out qualified and non-qualified dividends for tax purposes. You'll just need to reflect these in the proper spots on your tax forms.

And in both cases, if you ever go to sell a stock, your brokerage will / should indicate the cost basis of each and every share -- even partial shares accumulated through automatic reinvestment. You'll be able to see long and short term gain / loss for each share. I have no accounts at Merrill, so I can't vouch for them, but that's what I get over at Vanguard, and I'd be surprised if others did not do the same.

[rnsmth]

I drip now, but am considering changing that now that I am retired. Dividends are the only new money going into the IRAs. Selective reinvestment of accumulated dividends would allow me to open new positions rather than adding to current ones.

[earthtodan]

(03-30-2014, 10:51 AM)DRILLINDK Wrote: Thanks for the replies and all the great advice! I'm planning on establishing my DGI account with Merril Edge. They offer 30 free trades a month with what appears to be no catches as long as you meet the account requirements.

http://www.merrilledge.com/zero-dollar-t...arjyxksa_s

No catch, just free trades. I've been using MerrillEdge for about a month and I'm quite pleased. I qualify with just over $50k in my combined accounts. Free trades are quite liberating, in fact it changed how I invest. I can redirect dividends into single shares. I don't feel like I have to time the market to take a full position in something that looks expensive, because I can start small and ease into it. If something starts getting cheaper, I can chase it down as it goes. Also, no need to hope for price weakness in something you've set up in a DRIP. That's a bit of DGI training that I've been able to unlearn.

Dividend Mantra makes a good point, that if you contribute to your account every month and add the dividends to that purchase, the commissions aren't that bad. But what about your IRA? I only have $12,800 in my Roth and of course I can only contribute once a year. But because it's part of my combined accounts, I get free trades in there too. On Friday I got a $30 dividend from VTR, and on Monday I'm going to use it to buy 2 whole, non-fractional shares of ARCP. Or I might buy 2 shares of HASI, which is a new position I'm building out of dividend payments.

Also, the available research through Merrill is pretty good, which includes BofAML, Morningstar and S&P reports. I guess the catch is that you have to learn to like BofA. I had to hold my nose a bit when setting up the mandatory BofA checking account. But the rational part of me said make like NKE and just do it.

The other catch for me is that my securities and cash were transferring over from E*Trade right when the February dip happened, so I missed my chance for a lot of great deals, like JNJ at $86. Hopefully others have better luck with the timing!

[Dividend Watcher]

I drip everything right now but am thinking of turning some off.

I think there's a lot of consideration as to your age, investment temperament and size of the portfolio.

Age gives you plenty of time to build all those new positions you're establishing. This probably ties in with your temperament. Taking the dividends in cash has a lot of flexibility. The problem becomes, are you willing to keep adding to those smaller positions as the money is available? What happens if you end up with a portfolio of 50 positions of 5 or 10 shares apiece? Is it worth it to monitor that many companies worth only a few hundred dollars year in and year out? Even a double would only net you several hundred dollars for hours spent scouring earnings releases or annual reports. On the other hand, it does give you the flexibility to add companies to your portfolio you have some conviction about.

If your reinvest, do you think that in 10 or 20 years the company will still be performing similarly? That's a long time for a company to navigate without something changing either in the business or the economy. Kodak looms large in my mind but there are others. Are you willing to stick with it when things look dreary?

Then there's portfolio size. If the dividends don't add up to much and you don't have a regular infusion of cash to add and keep commissions low, is it worth it? My wife's portfolio is significantly smaller than mine and won't generate enough dividends to add a worthwhile position for almost a year. Sure, we added cash quite regularly but YTD her business is down 60% and mine about 15% so right now the account is treading water. For her, she'll be DRIPing for a while which is OK because none of her holdings are wildly overvalued and I've done all the re-balancing I wanted to do except for one open limit order. When business comes back, we'll get back on track. In the meantime, cash is earning zilch so better to reinvest and let those small sums compound.

As for me, I've finally reached a point where I will probably turn off reinvestment on those positions which are too large in the portfolio or their growth rate has slowed; CVX, T, PEP and maybe a couple others. I am loath to keep trimming positions just because they are too big; especially when I feel they are still fairly valued and have promising outlooks. If I turn of the reinvestment on my large holdings, then I can redirect it to those issues that are under-represented that I want to add to and are fairly to undervalued. My thinking is if I buy only a partial position, I want a plan to add more within a year to 18 months to get it closer to a full position. That's part of my plan to accomplish it.

Neither position is wrong. The tough part is coming up with a plan and sticking to it.

[DRILLINDK]

Thanks for all the great insight! One more question that I have developed throughout this process is how capital gains are taxed on foreign own stocks and dividends. I believe every country has establish separate taxes with the USA. For instance, I was interested in BNS and VE and speculative play of CHL.

[earthtodan]

There's a list of foreign tax withholdings and tax treaties on SA. It's a few years old so don't quote me on any of it. http://seekingalpha.com/article/248039-w...-dividends

I own BNS. You can reclaim the 15% Canadian withholding tax as a credit with the IRS. It's the same amount as US capital gains, and I actually kind of like it because it works like an automatic withholding plan. Your brokerage account receives only what you will get to keep, and at the end of the year the capital gains tax and the foreign withholding credit cancel each other out.

I have VE on my watch list, and I own SNY which is another French company. Note that France charges you a .02% (or something like that) transaction fee when you make a purchase, which your broker withdraws, but it's insignificant.

[hendi_alex]

There are also those annual ADR fees that get assessed, usually hitting my account for $15 each.