To Drip or Not to Drip – The Age old Question!
What is DRIP? Drip stands for Dividend reinvestment program.
Basically in your brokerage account you have a the option of buying additional stock each time you earn dividends on your stock or you can keep the money for withdrawal and use or you can have it automatically purchase additional stock. I will mention here that many companies have in house programs for dripping their shares but I consider that a mostly antiquated system so I will not cover it.
As an example on 1/10/2017 let’s say your investment in Altria (MO) paid you a dividend of $92.40. You choose to reinvest this in more Altria stock. So on that particular day the stock was going for $67.92 per share. Your dividends of $92.40 divided by $67.92 would buy you an additional 1.3604 shares of the MO stock.
Many investors say dripping your shares is the best way, and some investors prefer to take their dividends as cash accumulating the money until they can find a bargain in a stock, such as waiting for a market correction and then they jump in. Both ways can have their advantages but personally I prefer the best of both worlds! With those stocks that I consider my “Core holdings” I will continually Drip the Dividend. Examples might be Johnson & Johnson, Coca Cola, 3M, AT&T, Procter & Gamble, Pfizer ………. On the more speculative type stocks or riskier stocks I usually take the dividends in cash. Once I accumulate a desired amount of cash I purchase a stock or stocks that I have deem to be at reasonable entry prices.
Some investors will hold off until there is a major “market correction” of say a drop of 10 or 20%. This certainly wise but you also need to consider how long will it take until the next correction and how much in dividends will you give up during that time frame. If you are currently bringing in $60,000 per year in dividend income how much additional income could you be adding had you invested that money immediately versus waiting for a correction to occur? If it were to take three years for example how much income could you have make off of an additional $180,000 in investments? Always think about the consequences for investing and not investing. It has been my observation that there is almost always a bargain of an investment out there where you can park your money. The bottom lines is, there are no definitive right or wrong answers in most areas of investing but just make sure you consider every angle.
If this is just too complicated or confusing for you, my advice would be to go ahead and Drip all the investments in your portfolio. Set them on auto pilot and don’t look back.
When in doubt — Let it Drip !
Your thoughts and comments are welcome !