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Today I'll be sharing the pros and cons of using a Dividend Reinvestment Plan.

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Now for today’s piece:

To D.R.I.P. Or Not To D.R.I.P.?

Highlights

Introduction

DRIP is an acronym for Dividend Reinvestment Plan.

When a cash dividend is paid to shareholders, a DRIP plan will immediately reinvest those dividends to buy more shares.

DRIP investing has a few pros to it: It automatically reinvests and dollar cost averages for you without having to lift a finger.

It also has cons to it: You have less control over your portfolio and the buys are executed regardless of valuation.

Let’s weigh the pros and cons.

Advantages Of DRIP Investing

Automatic Investment

One advantage of DRIP investing is that it provides consistent contributions to your holdings.

It forces you to reinvest your dividends rather than spend them.

It’s perfect if you find yourself wanting to spend your dividends instead of reinvesting.

DRIP keeps you disciplined and reinvests without even having to think about it.

Dollar Cost Averaging

If you’re a fan of dollar cost averaging, DRIP is for you.

Whenever your dividends reach your account, they’ll be automatically reinvested into the stock that paid them.

Using DRIP is helpful for investors who use brokerages that don’t allow for the purchase of fractional shares.

The reinvested dividends would buy partial shares of a company that you otherwise couldn’t.

There’s also no need to worry about timing a buy, DRIP buys for you.

Disadvantages Of DRIP Investing

Less Control Over Your Portfolio

If you want total control over your portfolio, DRIP may not be for you.

When you have DRIP turned on you receive dividends, but they’re immediately used to buy more shares in whichever company paid them.

That company may or may not be at a good value.

With DRIP turned off, you still receive your dividends but you can choose to allocate them to a different company at a better value.

This brings me to my next point:

Valuation Is Not Considered

When you use DRIP, valuation is not considered.

Your dividends are reinvested right away, regardless of price or valuation.

If you were to turn DRIP off, you can pool your dividends and redistribute them where you see fit, even if it's not reinvested into the company that paid them.

For example, Company A might pay you a dividend and currently trades at 30x earnings. Instead of reinvesting into Company A which is a little pricey, you could take Company A’s dividend and reinvest into Company B which trades at 15x earnings.

Final Thoughts

Dividend Reinvestment Plans (DRIP) have their pros and cons.

For the investor who likes the hands-off approach, DRIP is a beautiful thing. You can turn DRIP on and let your dividends buy more shares for some hands-free compounding.

On the other hand, manually reinvesting your dividends can work for you if you’re willing to do the work. Being patient and reinvesting your dividends as you see fit will allow you to buy stocks at better valuations. It just takes patience, discipline, and valuation.

Since I’ve learned more about valuation, I’ve decided to turn DRIP off. I’d rather be patient and reinvest the dividends where I see fit.

Today, the stock market trades at about 18x 2023 earnings projections. Historically it trades around 15x forward full-year earnings so by that measure it's a little overvalued.

With that in mind, my approach has been to stockpile my dividends to take advantage of lower stock prices if the opportunity presents itself.

But for the investor who likes to set it and forget it? Using DRIP would work better.

Like many things in investing, there’s no right or wrong. There’s what works for you and what doesn't.

I hope this guide helps you decide if DRIP investing is right for you.

Happy Dividend Investing!

Sincerely,

Dr. “DRIP or no DRIP” Dividend

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Links And Memes

Here are some of the best things I read this week:

• 17 interesting facts about The Master’s Tournament – I personally can’t wait to swing my clubs after a long New England winter. (Joe Pompliano) Also if you’re looking for the cheapest eats around, check out the prices of food at the tournament.

• Point Nemo, the most remote place on Earth – The closest people to Point Nemo are in space 🤯 (All Things Interesting)

And of course, some memes:

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