Home Investments I am Done With Automatic Dividend Reinvestments

I am Done With Automatic Dividend Reinvestments

by My Journey to Millions

Every month I take an hour or two to create a dividend watch list where I attempt to find undervalued dividend champion stocks, but after I purchase my particular lot for the month it is set on autopilot until I decide to sell.  It was during a review of what, if any, positions I should  really started to think about the topic of *why* I am reinvesting my dividends automatically.

First and foremost, lets put it on the table we are not talking about a lot of money and I think that is why it has been so easy to basically ignore this topic/decision:

chart_2(1)For example, for 2014 that amount was $1,104.  That just isn’t a lot, but that is a terrible reason to ignore efficiency, right?  If I am not willing to put new money into a certain stock because it is overvalue in my opinion, why am I allowing dividend reinvestments to occurs without even thinking about it?

Pushing Me Towards this Decision

For the first time this year I took a look at what may be egregiously over valued thinking, and thus, my capital could be better deployed elsewhere.  I came across Coca-Cola, KO, it is one of my smaller positions only buying 2 ~$500 lots.  Currently, it is trading at a PE of 24, very close to the highest PE it has traded in the past 10 years, and nearly 5 times Graham Number (all information taken from GuruFocus on the night of 3/2/15).

KOYou may need to zoom in to see the picture, but despite not wanting to invest in the company in over a year I have allowed 4 quarters of dividend reinvestment.  Obviously an empire is not built on $32, but like I said that was two extra $500 lots I could have bought last year in a company I considered undervalued.

The Risk in Not Reinvesting Dividends

I think the biggest risk is to remember that the reinvestment of dividends is not part of my monthly contributions to the account.  If I am putting away $500 a month into the account every month I have to make sure that the dividends are on top of those purchases.  I don’t think it’ll be too difficult to just add whatever I received in the month before into the next purchase.

I think this very small risk is worth canceling my automatic dividend reinvestments for this particular account.


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JC 03/03/2015 - 9:17 am

I turned off the automatic reinvestment of my dividends for the majority of my portfolio for much the same reason. Although I recently turned a few of them back on. There’s pros and cons to both routes. You can get better value by pooling dividends with your regular monthly investments but if there’s nothing that you deem worthy of your investment dollars then who knows how long it’ll be until you invest that capital and get it working for you. So automatic reinvestment allows you to continually invest some portion each month. I think a big factor is how much do you have to invest on a monthly basis and how consistent those purchases can come. If you only have $100 per month to invest so you have to wait a while to build up enough capital to make a worthwhile purchase then automatic reinvestment is probably better. But if you have enough savings/dividends each month to make a purchase then I think it’s better to just collect the dividends as cash and then invest it with your cash. Either way, if you’re in the accumulation phase the key is to reinvest no matter what method.

writing2reality 03/03/2015 - 9:28 am

I am getting pretty close to switching off the DRIP within my taxable account given I am adding capital regularly. I will keep it on in my Roth DG account since my contributions are regular and the dividends aren’t large enough to reinvest on their own within a reasonable time frame. Once it gets to be about twice the size I’ll let it go as well.

Ken Faulkenberry 03/03/2015 - 9:51 pm

I have no argument with your decision to abandon automatic reinvestment of dividends. That allows you to put your monthly contributions plus accrued dividends in the best opportunity at the time. However, I think a little different in this manner. If I thought a stock had a valuation that was too high for reinvestment, I would simply sell it!

DivHut 03/06/2015 - 2:51 am

For now, all my dividends are being reinvested automatically. I have read numerous articles discussing the pros and cons for both approaches and quite frankly both make sense. Among the dividend blogging community you’ll find both auto re-investors and others who pool their dividends as a cash pile to be deployed selectively. Who’s correct? You can make an argument for either. I guess the bottom line is that it’s personal to your situation and investment style. I have thought about turning off re-investments but for now they all remain on for every holding I have.


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